NFTs have entered the real estate market – and into real estate tech and fintech conversations. For most people, it's unclear what NFTs are or how they are even created, let alone what impact they will have on the real estate industry. Will NFTs become a standard means of buying and selling property? Should real estate agents be worried?
What most people know about NFTs are the flashy examples of digital collector items trading at exorbitant prices with increasing frequency and popularity (especially when celebrities are involved). Japan's rainbow-powered Pop-Tart Kitty (Nyan Cat) has sold for around $600,000. A 10,000-piece iteration of Bored Ape has sold for $2.85 million. The space is booming and moving faster than EVs. According to BNP Paribas, the total value of NFT transactions worldwide in 2021 exceeded $17 billion, up 21,350% from “just” $82.5 million in 2020.
The craze for digital “art” traded on digital exchanges makes sense in a way. But trading a physical object, in this case the most important physical asset a consumer could ever purchase, doesn't. It's a staggering cognitive dissonance.
How does real estate become an NFT?
A year ago, TechCrunch founder Michael Arrington sold his apartment in Kiev, Ukraine, for 93 Ether (ETH), or about $93,000, using NFTs. This year, a five-bedroom, 3.5-bathroom home near Tampa, Florida, was purchased for about $650,000 worth of ETH. Previously, NFTs have been used to buy or rent everything from apartments and condominiums to office buildings and hotels.
Let's take a step back and explain in more detail. NFTs are non-fungible tokens, a new type of digital asset that is created and stored on the blockchain. What is a blockchain? Simply put, a blockchain is a digital ledger. When you “mint” an NFT, you are purchasing a piece of code that lives on a blockchain (specifically the Ethereum blockchain). This code can be anything, but it needs to be unique. Essentially, you are creating a new smart contract on the Ethereum network that defines your NFT. This smart contract can be for digital collectibles, gaming tokens, or ownership of real estate.
Why NFTS looks better than traditional transactions
Buying and selling real estate as NFTs is not only trendy, but also seems like a safe and efficient way to transfer ownership of real estate. Once an NFT is issued, the code is immutable and cannot be changed. Transactions are verified by computers around the world called “miners”. This makes NFTs tamper-proof and secure, preventing real estate fraud and theft. The smart contracts that power NFTs can automate many tasks traditionally performed by real estate purchasing intermediaries, thus saving time and money. NFTs can contain all relevant documentation, such as title deeds, and can be verified and transferred with a single click. Real estate NFTs can record and track the entire history of a property, from ownership to mortgage payments. Because NFTs can be divided into smaller units, they are especially useful for the nuances of real estate assets, such as fractional ownership and renting.
A new kind of deal, but still a home
In this discussion, NFTs are not bad or disruptive, they are simply a tool of the trade. The impact on agents and intermediaries will ultimately depend on how NFTs are used. NFTs are one dependent variable in the overall equation.
Since the asset being exchanged is still a house (or condo, or building), there are some fine print that cannot be ignored. Even if all the relevant documentation is safely stored on the blockchain and the cryptocurrency payment for the deed is confirmed, the transfer of the asset is not yet complete and cannot be completed with the click of a button. The sale of real estate as an NFT is not officially a reality in the real world unless it is recorded with the municipality. This is a fatal problem with no creative workaround. The cliffhanger will be resolved in our next blog: “Are NFTs Good for Real Estate?” Stay tuned…