Non-fungible tokens are widely used to sell digital products such as art and music, but they’re now being used to claim ownership of physical items, including real estate.
Commonly known as NFTs, non-fungible tokens are a unit of data stored on a digital platform that is unique and non-interchangeable. And their newfound popularity means they have the potential to change how real estate changes hands and to prove ownership over any asset.
Even if digital assets aren’t your thing, it’s worth getting a handle on what they are and how they could affect the real estate market as they become more widely used.
This year is pivotal for NFTs in real estate, according to Erin Sykes, who’s chief economist at Nest Seekers International. Right now, buying a property is a long process requiring lots of paperwork, but with NFTs, a property transaction can occur within minutes. Sykes said she believes the real estate community will soon start to see the effects of how NFTs can change transactions.
“We will begin to experience using NFTs in real estate to improve and streamline the closing process and work towards instantaneous settlement by using blockchain to register title, surveys, transfer a property and complete all background diligence, thus ensuring the transaction’s integrity,” said Skyes.
Sykes handles sales for The Waldorf Astoria Residences Miami, the first pre-construction high-rise in the U.S. to accept crypto as payment. And in the future, she suspects crypto will be used more frequently as buyers and sellers realize their savings with a reduction in fees.
“In 2022, as interest rates continue to rise, prices will stabilize and inventory will begin to reach equilibrium. Cash will continue to be king unless we are talking cryptocurrency,” said Sykes. “Simultaneously, we saw a substantial number of transactions involving cryptocurrency, including a $22.5 million penthouse at Arte Surfside in Miami trade in crypto in May 2021.”
The Dawn of Crypto Mortgages
The number of transactions without mortgage contingencies hit an all-time high in 2021, as buyers faced stiff competition for prime property.
Using cryptocurrency combines the security of real estate with the liquidity of digital assets, according to Josip Rupena, who’s CEO and founder of Miami-based Milo, a financial technology company that offers the world’s first crypto mortgage.
Milo’s mortgage allows buyers to use cryptocurrency Bitcoin to buy a property and qualify for a low-interest rate, 30-year-crypto mortgage. It will allow them to finance their entire purchase with no dollar-down payments required, which is faster than a conventional mortgage.
“It’s how people are choosing to keep their wealth. As crypto becomes more popular, there’s going to be more individuals that have crypto, and solutions like the one we’re building are going to be necessary,” said Rupena.
Conventional mortgages are still the norm, but Rupena said he believes there will be some sort of integration between NFTs and cryptocurrency combined with traditional buying and selling in the near future.
“How long that takes is the big question, but I imagine as there is consumer demand and an acceptance around crypto, then it’ll be more widely used and as a tool to provide credit to consumers,” said Rupena. “What may be different is elements like: can you do 100% of your financing in crypto? I think things like that will be more unique to companies like ours.”
Although the future of NFTs in real estate looks bright, Sykes said in the immediate future, the use of cryptocurrency will remain unusual.
“The way we hold escrow when doing a crypto transaction is via a stablecoin. When we see this instability in this stablecoin, it makes that escrow deposit highly variable and not viable for whatever we have in 30, 60, or 90-day, or even with new construction or multiple years. I expect a pullback in the usage of cryptocurrency in the purchase of real estate,” said Sykes.
A stablecoin is a cryptocurrency that is tied to a currency that is not backed by any commodity like paper money, or tied to a commodity like gold or real estate.
NFTs have a long way to go to become mainstream, but Sykes said they’ll still trigger huge changes in the closing process.
“The potential that we have in terms of holding the chain of title on the property via NFTs so it’s completely visible to anyone at any point and reduces the number of intermediaries needed, it might even eliminate the need for title insurance,” said Sykes. “That’s really a long-term picture because, really, the most critical parts of clearing title are dealing with municipalities, cities, counties, states and even the federal government who are not prepared yet to utilize NFTs.”
How to Prepare
As a growing number of people are holding crypto, Sykes said it’s important to get a good understanding of blockchain technology and NFTs, even if you don’t plan on using it.
“Perhaps sit on the sidelines and become familiar with the history and how economic cycles function,” said Sykes. “Because it might not be the right time to dive in headfirst in terms of owning NFTs, but that doesn’t mean you can’t educate yourselves on them.”
South Florida real estate investor and NFT expert Thomas Bayles said anyone interested in investing in digital real estate or in real estate projects using NFTs should start small.
“You have to look at these NFTs as a share in a company,” said Bayles, who’s managing partner at Urban Growth Properties, a vertically integrated real estate investment management firm.
He said using NFTs adds transparency to a transaction.
“Whatever you pay for that one share is transparent to everyone, so when you pay for that one share in Ethereum, typically, although it can be done in U.S. dollars, everyone can see you paid that much,” said Bayles.
It’s anyone’s guess how long it will take for buying and selling real estate with NFTs to be the norm, but Sykes said it will take at least five years.
“We need to get through the hiccups in the market now because there is so much instability and it’s going to be very difficult to work through any of these long-term needs and really trusting that NFTs and crypto are really long term solutions,” said Sykes. “We’re waiting on a bit of catch-up at this point.”