Non-fungible tokens (NFTs) seem to be in the news almost every day. From record prices of NFT art to NFTs used as marketing tools for popular fast food chains, the trend seems to be generalizing. As a gadget or collector’s item (sometimes both), NFTs are easy to implement and execute, but applying them to industries that are slow to change such as real estate is a much greater challenge.
Over the past year, experimental uses of NFTs have emerged in industry. Everything from construction projects to loans is tested as NFT by various companies looking to improve processes and speed up real estate transactions which can often be complicated by the many layers of document verification involved.
NFT in the real estate sector
NFTs are nothing more than unique digital titles (tokens) of property, whether real or virtual, which are stored on a blockchain ledger. Theoretically, this reduces the risk of harm from fraud and improves an owner’s ability to prove that they actually own something. But, when it comes to real estate, it’s much more complex.
There are two types of tokenization involved in real estate: whole asset (EA) and fractional ownership (FO). FO tokenization is quite simple. It’s similar to a crowdfunding platform or some other similar structure that allows investors to buy stocks. Each fractional owner holds a number of tokens that represent shares in the project, depending on how the investment is structured. FO tokenization is already used in limited cases in the real estate sector.
EA’s tokenization, on the other hand, can only work if the actual deed of ownership is turned into NFT. This is still incredibly difficult to accomplish due to the regulatory environment surrounding real estate investments, although steps continue to be taken to get the ball rolling on the court. Ultimately, there has to be a new asset class created for an EA token to exist for a real estate deed.
FO tokenization is much easier because companies that hold real estate assets are easily tokenized and distributed by NFT tokens, which are a type of security just like a stock share. And, like a stock market share, NFT tokens are intended to be registered with the SEC.
Digital real estate vs physical real estate
While it is still difficult to register individual physical homes as NFTs, digital real estate can be registered using NFT. Digital real estate doesn’t really have any regulatory rules since it exists in a virtual world which is the financially regulated equivalent of the Wild West.
Digital real estate exists in virtual spaces, often referred to as “the metaverse” or “sandbox platforms,” where users can interact with and build almost anything they want. Minecraft, for example, is a well-known platform that offers digital real estate potential. Other common platforms include Roblox (NYSE: RBLX), Decentraland (CRYPTO: MANA), Infinite Axis (CRYPTO: AXS), Upland, Cryptovoxels and Somnium Space.
Just like real estate, virtual real estate lots are designated parcels in the space designated for the platform. There is a limit on the number of plots available, depending on the platform, and it creates a shortage in the same way that there is not a lot of land in the physical world. For example, Decentraland has 90,601 individual plots, each traded as a type of NFT known as LAND, and they are purchased using a cryptocurrency called MANA.
How do real estate NFTs work?
Real Estate NFTs work like any other NFTs. They are bought using a cryptocurrency of the seller’s choice, held in a digital wallet and, if speculative, are sold at a profit to a buyer with the correct amount of money.
Investments held in the form of FO tokens behave more like stocks in that they represent a part of a real estate project rather than a single real or virtual element. Profits are paid like any other type of equity-based investment, as ownership is only a part of a business. For example, if you had one of 10 tokens from a real estate company that invests in apartment buildings, you will receive a check at the end of a profit cycle that is 10% of net profit (unless you have different agreement in place).
As with all NFTs and stocks, you have the right to severability, which means you can usually sell these tokens at any time. Some crowdfunding platforms for real estate investments require that you hold your shares for a certain period of time, and platforms supported by NFT will also likely have a minimum holding period as they become more popular.
Use of NFTs in Mortgages
NFTs aren’t really widely used in mortgage products, but they could become more popular. LoanSnap, using its Bacon protocol, offered the first NFT mortgages in the form of home equity loans. They treat loans like regular mortgages, but issue NFTs instead of just creating mortgage notes with liens.
So far, only a handful of NFT mortgages have been issued and are not yet available for mortgage note or cryptocurrency investors to consider for their portfolios. However, LoanSnap plans to issue a stablecoin called bHome, which will represent fractional ownership of one of the NFT mortgage notes. Investors will also allow additional NFT mortgages by providing financing to prospective borrowers.
Advantages and disadvantages of real estate DFTs
Because real estate NFTs are so new, it’s hard to really assess their strengths and weaknesses. There are currently many experiments going on that will help investors better understand where NFTs can and cannot be applied in the real estate industry.
However, we do know some things. First, real estate NFTs, like any other NFTs, promise easily traceable and secure property records for a wide range of real estate investments. Second, they will enable the buying and selling of real estate in virtual worlds, which emerge as an investment frontier.
On the flip side, like everything else in the crypto world, real estate NFTs are generally unsecured and their value can drop to zero without warning. Real estate NFTs linked to virtual real estate will be particularly risky investments for some time. NFTs that represent fractional ownership in real world investments should be more stable.
The future of real estate NFTs
Right now, the marriage of real estate and DTV is at such an early stage that it is difficult to make predictions. NFTs, in theory, can provide easy ways to transfer ownership of shares in real estate investments or virtual real estate – but don’t expect them to transfer entire properties anytime soon. The few whole units that were sold using NFT were sold as part of a package. A house sold in Ukraine, for example, was included in the sale of a business that was the real DTV.
Current real estate laws make it very difficult to own entire real estate like NFT. As blockchain technology and other tools in the crypto toolkit prove to be more and more useful for things like creating mortgages and generating crowdfunding opportunities, they are likely to change. . Until then, look for opportunities to hold portions of mortgage debt, construction projects, and other group investments in the form of NFTs.