What Are Real Estate NFTs? Everything You Need to Know

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When you think of non-fungible tokens (NFTs), your mind likely wanders to cryptocurrencies like Ethereum, Solana, Polygon, and other blockchains capable of handling digital currencies and artworks. However, NFTs go far beyond pictures of bored monkeys and CryptoPunks. Here’s a closer look at the real estate NFT landscape so you can better understand what’s happening and the potential future for NFTs and real, physical property.

Virtual Real Estate vs. Physical Real Estate NFTs

When discussing real estate NFTs, it’s essential to differentiate between virtual real estate and physical real estate. Virtual real estate represents an online representation of real estate. That could be a part of a game trading real-world properties or buying up land to develop in a virtual world. Physical real estate is the physical home you live in, the building you work in, and other real property.

Just like in real cities around the world, the virtual real estate market is starting to heat up. You can buy virtual representations of real properties through games like Upland, which uses the EOS blockchain to sell homes, offices, and other locations in a growing list of cities around the United States. That’s different from games like Decentraland, where you can buy property to build a new virtual world.

Virtual and physical real estate carry value, both in terms of cryptocurrency and fiat currency. But as more options to buy and sell homes and other properties using blockchain technology crop up in the real world, the future of real estate could change forever.

Could NFTs Impact The Physical Real Estate Industry?

If widely adopted, NFTs could absolutely impact the property industry. Because NFTs rely on the same blockchain technology as cryptocurrencies, real estate could enjoy many of the same benefits if property titles were converted into NFTs.

Those include:

  • Undisputed history of property ownership: Blockchains provide a record of ownership for every asset from inception to date. Once tracked as an NFT, every property would have a clear ownership history and clearly states who owns the property today.
  • Fast and secure transfers: Some blockchains process transactions in seconds for less than a penny. If you know the other party’s digital wallet address, you can securely transfer ownership without a middleman.
  • Smart contract security and automation: Smart contracts allow developers to create an “if this then that” logic on top of a blockchain. That could create a series of automated transactions for escrow, payment, and title transfer. Once the title and payment are received, the contract could automatically disperse payment and transfer the title simultaneously.

Selling or transferring an NFT property could hypothetically be done without the interference of a real estate agent, broker, title company and banks. You could seamlessly transfer the property to your kids or a trusted buyer with a few clicks of a mouse. Or you could set up your own lending business and transfer property through smart contracts and decentralized finance (DeFi) apps. The possibilities for the real estate industry are exciting to consider.

Is NFT Real Estate Legal?

For virtual NFT real estate that’s part of an online game or metaverse, there are no laws or regulations at this point preventing you from playing. If you understand the risks and costs, it’s very similar to playing any other video game. (However, if you use cryptocurrency and trade NFTs, remember to keep track of your gains and losses for tax reporting purposes.)

But when it comes to physical property, legality gets a bit more complicated. Real estate transactions and loans are highly regulated in the United States. And the legal enforceability of smart contracts are still under contention. Currently, a few companies are navigating the complicated legalities of selling real estate-backed NFTs. Propy, a real estate blockchain startup, has successfully sold two NFT properties, including an apartment in Kyiv and a house in Florida (the Florida house was purchased for 210 Ether, or $654,309.60). They’re getting ready to auction off a condo in Tampa Bay next.

Through Propy’s auctions, prospective buyers bid for a non-fractional NFT associated with a US-based entity that owns the property. Once the auction goes through, the buyers receive the legal documents within moments of the sale appearing on the blockchain. To ensure security, Propy vets each prospective buyer and verifies their identity and available assets. Decentralized Finance (DeFi) loans can also help bolster the buyer’s crypto wallet, relieving them from going through a bank to secure a mortgage.

Buyers get the boasting rights of being able to say that they bought one of the first NFT real estate properties in the country. But both DeFi loans and real estate-backed NFTs are in their wild west eras. So serious homebuyers will want to weigh the risks with extra caution before jumping in with a bid.

Disadvantages of NFT Real Estate Investing

While NFT real estate investing offers many potential advantages and opportunities, there are some serious kinks to work out. As with all cryptocurrencies, some security, technical, and privacy concerns are sure to influence the development of the industry.

Real estate transactions are designed to protect the buyer and seller through a series of events. These include contracts, inspections, and collaboration between expert parties who guide the buyer and seller through the transaction. These protections could be lost when individuals opt for the convenience of using NFTs to sell or buy their properties.

Also, because blockchain transactions are not reversible, there’s a severe risk of fraud. If someone sends a payment or NFT to the wrong person or wallet address, there’s very little chance of ever getting it back. The banks and real estate companies charge a lot in fees. But they also work hard to protect you from losing your money and falling victim to scams.

Lastly, the platforms and exchanges where trades occur are far from infallible. OpenSea, one of the biggest NFT marketplaces in the world, recently fell victim to a phishing hack and lost hundreds of NFTs—an estimated $1.7 million in lost tokens. These were mostly art pieces and other goods, but imagine if it was your home.

What Comes Next?

Despite the risks, several real estate and blockchain industry leaders have noted the wider potential of real estate and NFTs. An early real estate DeFi industry is coming together, with players like Milo offering mortgages with Bitcoin as collateral and Vesta Equity running a HELOC business using blockchains and tokenized transactions.

In the future, mortgages could even operate through smart contracts. Fractional NFT ownership could allow investors to join together to buy a property. It could also make it easier to divide up ownership with a spouse or business partner. The benefits of decentralized finance could allow borderless lending and easy international sales. You may be able to find the best interest rate from a lender on the other side of the world. And blockchains and smart contracts could facilitate a safe and speedy sale.

While we’re not there yet, it’s not hard to imagine a world where you can buy and sell real estate with the same simplicity as buying and selling stock or ETFs today. With smart contracts, NFTs, and cryptocurrencies, two parties could come together to put together their own real estate transaction without paying service providers an arm and a leg and waiting weeks or months for the sale to complete.

The Bottom Line

NFTs are fun to buy and sell digital artworks, but they can power much more than this simple online trading. When real estate titles turn into NFTs, the undisputed ledger and potentially low transaction costs are shaping up to revolutionize the world of real estate.

Further Reading: Why the Metaverse Will Kill Bitcoin

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