What are NFTs?
Non-fungible tokens, also known as NFTs, represent digital or physical assets that are unique and non-interchangeable. Just like cryptocurrencies, NFTs include data stored in a decentralized database called the blockchain.
The most common NFT use cases include online game items, such as armors and avatars, or real-world items in the form of company shares and works of art. Some real-world NFT items can be found in popular games, such as Axie Infinity, Decentraland, and Sandbox.
There are other use cases for NFTs, including physical and digital art, music albums, event tickets, and collectibles depicting NBA highlights. These NFTs, whether bought, sold, or traded, can be valued anywhere from a few dollars to millions of dollars, depending on the rarity of the item.
The technology behind NFTs is also slowly penetrating what was once very physical and non-technological industries such as fashion and real estate. In the fashion NFT space, Dolce & Gabbana and Jimmy Choo hit the 2021 New York Fashion Week with their first NFT collection while Nike announced its purchase of RTFKT in Q4 of 2021, showcasing its first venture into virtual sneakers.
Within real estate, an NFT could be associated with a property deed, a title, or a certificate of authenticity for a specific property. Each token issued would be unique to its owner but all related tokens will have access to a single ledger based on blockchain technology that is distributed across multiple participants.
Let’s do a deeper dive into real estate NFTs in this article.
How can NFTs help real estate?
Real estate is a traditional industry that has operated on paper for a long time. In order to understand how NFTs will transform real estate, it’s helpful to compare it with its predecessor—the conventional property market.
There are several disadvantages in the process of acquiring a physical property, including the long and dragging paperwork, which involves several middlemen to complete the transaction. Can NFTs answer this hurdle? It can. An NFT confers the legal title of a real estate asset if the property seller is able to do the required steps in the sale just like in the traditional market.
One example of a successful real estate NFT sale is TechCrunch founder Michael Arrington’s apartment in Kiev, Ukraine. It was sold over the Propy platform for $93,000 worth of Ethereum in 2017.
In the future, you can buy the asset and it will be recorded in the blockchain. However, laws and regulations will have to keep up with the technology to make this happen.
There are several ways in which tokenizing real estate into NFTs can help:
NFT technology allows every transaction to be recorded on the blockchain. It does not allow changes or alterations and since it’s open-source, anybody will be able to track the data. In hindsight, useful information will be readily available to the buyer, including who last owned the property, how much it was sold for, and even high quality-market data.
This real-time access to information will empower the buyer to make sound financial decisions prior to shaking hands with the property owner.
As previously mentioned, legal compliance will need to play catch up with the technology in order to execute a sale fully, including that of the paperwork with the click of a button. The possibility of having an efficient system in place to aggregate listings, browse, filter per area, and make deals instantly is mind-blowing.
NFTs can help verify ownership and transfer of property without going through too many hoops.
When you own property, you are tied to that place or asset for a while until it is sold as it is considered illiquid. The turnover for real estate transactions takes time and the process of selling isn’t exactly a smooth road.
Should a property be sold as an NFT, it is done through its tokenized form, which means that the trade or sale will be much quicker and more convenient. NFTs can be traded on the market and they can also help reduce transaction costs.
Fractional ownership means having a piece of the asset alongside other owners to cut the upfront costs of owning the property. This opens the door to many investors and more people taking advantage of the asset without having to pay the full price.
The costs for maintaining the property or handling tenants can also be too much for a single proprietor. In this case, fractional ownership can be a good advantage.
How does selling real estate in the form of NFTs work?
Real estate is a fundamental part of everyone’s life, whether you are a consumer or an investor. But it can be hard to find good real estate at a fair price—and often, properties are sold on commissions, so consumers and investors have to pay more than they should for something that isn’t even theirs.
Luckily, blockchain technology could make all of that easier by allowing individuals who want to invest in real estate and property owners who want to sell to connect directly with each other.
How does the sale work? First, a real estate property is tokenized into an NFT. It is the process of creating a token that represents the property. When tokenized, the asset will be registered in the blockchain, including pertinent information such as its value, the last owner, and the legal data proving ownership.
After which, a step called minting is involved. Minting is the process of uploading the JPEG and smart contract of the NFT in an NFT marketplace. Buyers on the platform will be able to view your real estate NFT and place their bids on this platform.
It’s almost the same process as buying a cryptocurrency. Once you pick an asset, you can pay for it via your mobile phone and the NFT (i.e ownership in the physical property) can be instantly transferred to your wallet.
A company called Brickblock tokenized real estate shares of an approximately €2 million property in Wiesbaden, Germany. This includes processing the paperwork, from the technology involved to legal compliance, which fast tracks the whole sale.
Challenges to the adoption of NFTs in real estate
The real estate sector is large and holds a lot of weight in an economy. In fact, many developers and brokers like to refer to property as the world’s most traded asset class. However, there are numerous challenges that come with owning property, ranging from regulation to liquidity issues.
The challenges of a real estate using NFTs can be broken down into two categories, market size and industry readiness. The real estate industry is large, but at roughly 0.75% of total financial assets, it remains small when compared to other financial markets like forex (5%), fixed income (4%) or equities (35%).
In general, for a new technology to gain adoption in an established market, it must solve an issue that hurts one of these three groups—users, providers, or investors—and offer a solution that is significantly better than current offerings. This means that there needs to be early adopters who understand the technology and how it fits into their business model, with enough business scale to attract other participants.
Just like the case of BItcoin and other cryptocurrencies, tokenizing assets into real estate NFTs also come with the burdensome debate of carbon footprint. Mining, one of the steps involved in transforming a physical asset into a digital one, requires an energy-intensive validating process. The environmental impact of digitizing the assets is one of the major challenges in mass adoption.
While there may be a chock-full of challenges at this point, the possibilities of the technology are far-reaching. Young real estate developers continue to take advantage of the new technology to reshape the landscape and this effort should not be underestimated.
As with any blockchain investment product, real estate NFTs are speculative, which means the value can also go up. The future is bright with real estate NFTs, especially as the technology evolves and the bridge between the physical asset and the tokenized asset becomes seamless enough to transform and disrupt the way we do business in this sector.