How NFT Real Estate Works: Investing in Property as NFTs

Currently, NFTs are mostly used to sell digital products, like art, music, and collectables. But as NFTs begin to extend to real-world items, the possibilities for buying and selling physical commodities, like real estate, are immense.

How NFT Real Estate Works: Investing in Property as NFTs

What are NFTs?

NFTs are unique tokens that are issued on a blockchain — blockchains are immutable, digital ledgers that record and track transactions within a network. This underlying blockchain technology allows NFTs to act as digital receipts that supply proof of ownership for a virtual (or physical) item. Currently, NFTs are mostly used to sell digital products, like art, music, and collectibles.

As NFTs begin to extend to real-world items, the possibilities for buying and selling physical commodities, like real estate, are immense. 

NFTs in Real Estate

Investing in real estate is not without its drawbacks. It comes with a huge amount of paperwork, bureaucratic hurdles, excessive fees, and middlemen. These obstacles prevent many people from pursuing homeownership, including first-time buyers, as well as anyone who doesn’t have an extraordinary amount of resources.

That’s where NFTs come in. NFTs have the potential to solve some of the biggest problems in real estate, and subsequently, transform the industry. By streamlining the transaction process they will effectively allow any buyer to assume ownership in a matter of minutes. This is a massive improvement on the current timeline, which can last weeks, or even months. 

NFTs enable faster timelines by creating a token that represents physical real estate. Currently, there are two types of tokenisation in real estate: fractional ownership (FO) and entire asset (EA).

What is Fractional Ownership (FO)?

Fractional ownership is fairly straightforward and very accessible. It allows owners to sell a portion of their property to a number of small investors by issuing tokens on the blockchain. Think of it as crowdfunding, but for real estate investment. Investors who hold these tokens can then receive a rental income for doing so. They also have the option of performing a profit split on capital appreciation when the property is sold.

Long-term, NFTs could afford anyone the chance to buy and sell fractional ownership of rental properties without losing money to middlemen. These cost-savings effectively open up access to an entirely new demographic who would otherwise never have had the opportunity to invest in real estate.

What is Entire Asset (EA)?

With entire asset tokenisation, buying real estate become a bit more complicated. EA tokenisation is only possible when the actual property deed is turned into an NFT. Unfortunately, this is still immensely challenging to accomplish because of the regulatory environment surrounding real estate investments.

In the US, for instance, legislation will need to be restructured, since deeds cannot be linked to an NFT under the current rules. Once a new asset class is created for EA tokenisation, then NFTs will be able to serve as real estate deeds. We’re not sure when this will happen, but there have been moves to instigate creating this new asset class in the United States.

Digital Real Estate VS. Physical Real Estate 

While registering physical real estate as an NFT still presents a challenge, the same cannot be said for digital real estate.

Digital real estate exists in virtual spaces, like sandbox platforms, and what is often referred to as ‘the metaverse’. Some of the most prominent platforms include Decentraland, The Sandbox, and Roblox.

While theoretically there could be an endless supply of real estate in a virtual world, platforms have engineered scarcity by placing limits on how many parcels of land are available. Generally, users still have an immense amount of freedom in these spaces. They can construct whatever they want and interact with anyone or anything.

Examples of NFTs in Digital Real Estate 

When it comes to using NFTs to sell property, digital real estate is way ahead of the curve. Take Decentraland, for example. The platform trades each of its digital properties as unique NFTs known as LAND, which can be purchased with its native cryptocurrency, MANA. Similarly, The Sandbox uses its native cryptocurrency SAND to trade properties, while Genesis World primarily trades in GENESIS tokens.

But physical real estate may finally be starting to catch up thanks to the pioneering work of a handful of forward-thinking tech companies.

Back in 2017, Propy — a silicon valley property technology (proptech) company — sold the first-ever physical real estate NFT for a piece of property in Ukraine. The Kyiv apartment belonged to TechCrunch Founder, Michael Arrington and was sold to Devon Bernard.

Propy is a prime example of companies that are paving the way to transform the world of real estate through blockchain technology. Propy’s mission is to remove barriers to real estate ownership by automating the real estate sales process. Their groundbreaking methods use blockchain technology to enable online, self-executing real estate transactions, which are carried out using smart contracts.

Other companies that are boosting the real estate industry through blockchain technology include, Harbor, which helps companies tokenise their assets, and Reasi, whose blockchain-based escrow platform accelerates the real estate buying and selling processes.

The Advantages of NFTs in Real Estate

Real estate NFTs are still in their infancy, so it will be some time before we can fully gauge their strengths and weaknesses. As more companies implement and experiment with NFTs and property, we’ll start to see the advantages of NFTs in real estate.  

One of the most promising advantages of real estate NFTs is their ability to provide easy traceability and reliable records of ownership for real estate investments. This will minimise paperwork and bureaucratic obstacles, granting many more people access to the real estate industry. 

 

The Future of NFTs in Real Estate

NFTs are set to disrupt a number of industries, not least of which is physical real estate. They have the potential to combat fraud, streamline the buying and selling process, and allow much greater access to investing in real estate. Of course, the rate at which NFTs will be adopted in real estate depends on a number of factors and will vary from country to country.

Although real estate is known for being slow to adopt new technology, we’ve already seen trends towards a more digital industry. Propy’s NFT sale of an apartment in Kyiv is just one example of blockchain technology’s tremendous potential to transform the world of real estate. We’ll be keeping an eye on how this technology develops, and we can’t wait to see where it leads.

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