Digital platforms like Zumper, Zillow, and Homesnap have made it easier for people to relocate. They cut down on commission fees and act as real estate mediators, saving people time they would otherwise have to spend dealing with the legalities. Nevertheless, there is still a middleman taking a cut.
What if there was a convenient way to cut out costly middlemen altogether? Many people want to do it all with just a few clicks of a button or swipes of a screen. There are several sectors of crypto that are burgeoning with potential for the real estate industry as the public becomes more interested in digital currencies. Just look to the rapid rise of NFTs and the metaverse to understand the potential at play.
Real Estate meets NFTs
The concept of Real Estate NFTs sounds easy on paper. NFTs represent real-world assets, but they are traded on decentralized platforms such as Open Sea, Super Rare, and Rarible. These platforms are developed with blockchain technology, allowing for the authentication of digital assets and the transparent recording of transactions to show proof of ownership. Items such as art, music, avatars, play-to-earn gaming assets, and even land are being minted in NFT form. The pioneer of land minted as an NFT was in Decentraland.
While Decentraland led the way in 2017, they have been met with some stiff competition by Sandbox. Sandbox had a fast rise in the metaverse, with over $420 million in sales volume, whereas Decentraland raked in just under $200 million.
Why the sudden rise in prices and popularity? Much of the world has shifted to a more virtual environment in the past few years. Widespread adoption led to a fast-growing market as savvy consumers realized NFTs could be used to sell assets and host interesting events in the metaverse. Additionally, many celebrities and corporations decided to capitalize on this burgeoning movement to grow their brands.
Snoop Dogg in particular capitalized on it, selling Snoopverse assets in the Sandbox. Snoop isn’t the only one; notable businesses in the metaverse real estate sector include: Atari, Samsung, Adidas, PricewaterhouseCoopers, Prager Metis, and Miller Lite, to name a few. This list is growing by the week.
This goes beyond just owning land in the metaverse. Some are leasing land, selling the products of others, advertising their own products, leasing advertising to others and hosting events. We are just getting started.
The Metaverse mirrors the real world
As real estate has plunged into the metaverse, some businesses are being notably prescient with their strategies. The place for the first real estate marketplace on the metaverse that will provide analytics and brokerage services with transparency is still vacant. For the market to mature we need a platform that will provide an assurance of service to the buyer and assurance of payment to the seller. This connects creators, investors, and metaverse users in one single platform.
We are also starting to see metaverse real estate practices mirror those of the tangible world’s real estate industry. Upland is taking the augmented reality (AR) approach, using the technology to sell real-world addresses and landmarks, which can be advertised on and decorated with art. Users will be able to access the world through a mobile phone or with AR glasses in the future. Upland players can even buy plots of land based on real-world property that Upland is licensing through the mapping provider Mapbox before developing them to generate revenue. Think of it as a modern-day virtual version of Monopoly. If you buy a handful of properties in a popular area, you can increase your chance of profit.
There seems to be a theme here in the metaverse: location, location, location. The digital landlords of the future could have the opportunity to become virtual real estate moguls of tomorrow.
Buying and renting land in the metaverse can get expensive. What if you could take out a mortgage? Well, now you can, thanks to TerraZero. On January 29, 2022, TerraZero issued one of the first mortgages in the metaverse. It was a two-year mortgage for a $45,000 parcel of land in ‘Decentraland’, a Metaverse with approximately 92,000 parcels, for an undisclosed down payment and interest rate. TerraZero provided the majority of the lending funds for the client’s virtual real estate purchase.
From Virtual Real Estate to Physical Real Estate
Meanwhile, back in The Sandbox, a couple of companies are introducing the first-ever “MetaReal Mansion,” a real-world home that also includes a virtual counterpart in the metaverse. General contractor and investor Gabe Sierra teamed up with ONE Sotheby’s International Realty and Voxel Architects to produce this unique NFT. The eventual buyer of the NFT will also acquire the ownership rights of the physical home itself, which is set to be built in Miami, Florida in Q4 2022.
Elsewhere, Propy is a real estate startup looking to lead the way in the physical real estate NFT market that’s already generated a number of crypto news cycles. Propy’s first-ever NFT-backed property sale came last May, when the company auctioned off TechCrunch CEO Michael Arrington’s Ukraine apartment.
Then, this February, they sold its first NFT-backed property in the U.S. A 2,164-square-foot house in Gulfport, Florida, fetched $653,000 (210 ETH) at an auction, with the winning bidder being awarded an NFT as proof of the home’s ownership. The NFT utility unlocks a smart contract, settling the issue of property ownership on a county level. Propy is also working on a platform to enable agents to earn tokens and create personal NFTs, all while utilizing the Propy Offer and Transaction platform.
The Propy NFT property sale was done on the county level. The method of selling an NFT to represent an LLC has been the only known option so far. While investors can buy and sell NFTs on a site such as Opensea, those are digital properties on the blockchain and there are not always KYC (Know Your Customer) laws in place within the crypto space.
When it comes to physical property, especially land and homes, there are laws, regulations, and taxes involved. For a deal within the U.S., there must be compliance with the U.S. Bank Secrecy Act. As the crypto marketplace matures, KYC laws and other regulations will become more important. Laws across the U.S. may have to change how deeds get recorded. You can’t be selling anything to anyone without knowing who they are, let alone real estate that will be traded on secondary markets.
Only time will tell if this type of largely unregulated property transfer will be allowed to continue to happen. We may see different laws for different counties and states at the outset. Federal law reigns supreme in most cases, yet it could take longer to materialize depending upon political circumstances. Regulators and legislators are still trying to wrap their heads around what to do about crypto.
Fractionalized Ownership
There is also tokenized real estate. Most people don't know this, but you can not legally tokenize an actual property. To tokenize real estate, you must tokenize the LLC that owns the property rather than the property itself.
Once the LLC is tokenized, you then fractionalize the LLC into a certain number of digital tokens built on top of the blockchain of your choice. Real estate tokenization is very similar to fractional real estate investing in this sense. Using the aforementioned LLC method, there are several companies offering partial ownership of property with several options to earn profit. Let’s explore what they’re doing.
RealToken provides investors with a simple, intelligent, and user-friendly method to buy into fractional and tokenized properties. Investing with RealToken means low maintenance property ownership, access to cash flows related to the property (e.g., rent), and frictionless ownership transactions via RealTokens.
Ownership of each property is distributed across a finite number of representative tokens. Token owners can collect revenue from rent and vote on property decisions based on their overall token share. Each RealToken property has a property management company overseeing it on RealToken owners’ behalf. The property management company sources tenants, collects rent, and manages repairs so the diverse group of RealToken owners don’t have to.
Next up is Lofty AI. Like many crowdfunding apps before it, Lofty sources and renovates properties before renting them out. Then it creates a Non Fungible Token of the LLC interests and sells them to investors. Investors are then entitled to daily rental dividend payments made through Lofty’s platform.
Lofty earns income by taking a listing fee. Lofty went through Ycombinator, a highly respected startup accelerator, and initially began as an AI-as-a-service firm to help investors find up-and-coming neighborhoods throughout the US. However, they pivoted last year to get more skin in the game and invest in properties directly.
NFT Mortgages
LoanSnap uses its Bacon Protocol to offer the first NFT mortgages as home equity loans. The Bacon Protocol introduces a new way for crypto wallet holders to hold a coin backed by the same types of mortgages that banks, insurance companies, and governments use. Because of the efficiency of the blockchain, users of the Bacon Protocol get the majority of the return, about 2 - 3% vs a standard 0.1% if you kept that money in a savings account. Bacon Protocol’s stablecoin, bHOME, is backed by liens against homes in the United States and grows based on payments from the loans made against these liens.
Pros and Cons of IRL Real Estate NFTs
Pros:
Legal right to control the property.
- As fractional real estate becomes more accessible, people will be open to more investment opportunities.
- Blockchain technology will allow for more transaction tracking and transparency of information.
- Combining real world real estate with metaverse real estate will allow for experimentation of building and designing homes, properties, cities and more, without incurring the high cost of planning, building materials and man power.
- NFTs could transition into cryptocurrency collateral, helping owners get mortgages smoothly.
- The speed and scalability of blockchain technology is a better solution to our current system.
Cons:
- The technology is moving too fast for many regulators, legislators, and everyday people to keep up with.
- Trying to explain this complicated technology to average people.
- NFT token holder could force someone to sell his or her home if the holder owned enough of the tokens.
- If a borrower falls into default, who can collect on the debt? It would be a problem if each creditor could collect individually, both for the lender and the debtor. On the other hand, if only one party can collect, this would make these type of mortgages not much different to peer-to-peer lending platforms and, therefore, susceptible to the same problems of centralization.
- It is also dependent on the type of ERC that the NFT is being minted as. Some types of ERCs, such as ERC-721 tokens, allow for the changing of metadata and can be a threat to the asset’s security. Since real life real estate NFTs are very new, there is no set standard yet.
The future is approaching fast
Cryptocurrency is barely over a decade old and is starting to find its way into our everyday lives faster than the internet did at its conception. The point of the blockchain is having a true peer-to-peer economy by pushing for decentralization and cutting out unnecessary middlemen. The blockchain serves as an answer to the fact that as the world has become more globally connected, power structures still remain in the hands of a handful of corporations, banks, and elite organizations.
The old way of doing things is not working, yet the new system is still maturing. The two may need to find a way to coexist and work together, lest the world end up with two dysfunctional systems and many people left behind on the sidelines.
The LLC model for property transfer through NFTs is a temporary loophole, but that could be remedied with the snap of a finger by regulators or legislators. The past year alone has seen many big businesses involve themselves with NFTs, the metaverse, and the broader blockchain space. They see the writing on the wall and are adapting to the change.
Hopefully, we will see more mainstream adoption of this technology, as well as proper regulations and transparent guidelines, so that the crypto and blockchain space can move forward and change our world. How we do business, maintain our homes, keep track of information, and build a brighter future together could all be radically changed by this exciting sector that’s rapidly gaining public attention.