When Purchasing a Real Estate NFT, What Are You Buying?

NFT home sales will be the next step in the rise of Cryptocurrency in the real estate market, but there are still a lot of unknowns in this new frontier.

As Virtual currency has exploded into the mainstream, the real estate market has begun to feel the effects. Developers seek to grab headlines by allowing properties to be purchased using Bitcoin and other digital currencies.

Buyers want to be able to use their valuable digital assets to purchase real estate. In recent months, the real estate Crypto craze has reached its inevitable next stage: the race to find out how to sell and buy homes with non-fungible tokens, commonly referred to as NFTs.

Investing in NFT Real Estate

Non-fungible tokens (NFTs) appear in the news almost every day. The trend is catching on, from NFT record-breaking art prices to NFTs used as marketing tools for popular fast-food chains. NFTs are easy to implement and enforce as a trick or a combination, but applying them to slowly changing industries such as real estate is a considerable challenge.

Over the past year, practical uses of NFTs have emerged in the industry. Everything from project construction to lending is being tested as NFTs. In addition, various companies seek to improve the process and speed up real estate transactions that are often complicated by multiple layers of document verification.

Non-Fungible Tokens In the Industry of Real Estate

NFTs are nothing more than unique digital (tokens) of property, real or virtual, stored on a Blockchain ledger. Theoretically, this reduces the risk of loss due to fraud and improves the owner’s ability to prove that he owns something. But, it’s much more complicated when it comes to real estate.

There are two types of real estate tokenization: entire assets (EA) and partial ownership (FO). FO tokenization is quite simple. It is like a crowdfunding platform that allows investors to buy shares. Each partial owner has several tokens that represent the shares in the project.

NFTs Are Unique Digital Tokens

Uninitiated NFTs are unique digital tokens (purchased with Cryptocurrency). They securely provide sole proprietorship of a digital asset through Blockchain, where the property can be publicly tracked and quickly sold.

NFTs are commonly used to buy and sell digital assets, such as art or music. But they can also be used to trade physical property ownership rights, as long as the object title or the ownership agreement is linked to the NFT.

Theoretically, this could be true for real estate, and Crypto enthusiasts are eagerly awaiting the possibility of commercial actions and property titles to be handled the same.

The World’s First Real Estate NFT 

In May, Michael Arrington from TechCrunch listed his apartment in Kyiv, Ukraine, as a real estate-backed NFT through a real estate platform. He was buying real estate by using Ethereum in 2017. The NFT that will transfer property ownership was listed at auction for an initial bid of $22,000 and sold for over $94,000.

The Real estate agent called the sale “the world’s first real estate NFT,” and now its website offers a form for sellers interested in the “Your Property NFT” option.

Developer Prometheus recently sold two luxury homes in Portugal for Cardano Cryptocurrency. He also made the property available through NFT, “allowing future owners to resell properties at the click of a button via Blockchain tech.”

Tax and Title Transfer Headaches

The most obvious consideration for the buyer in the NFT Property deal is whether your digital purchase will provide homeownership through all traditional channels.

Mr. Heber said: “The interesting thing is that this is a case where the law has not taken hold of the technology.”[The United States] and state municipalities need to change the law on how actions are recorded.

In addition, buyers or sellers may have legal concerns about who else is at the other end of the contract. To sell Prometheus’ NFT, the company allegedly developed protocols to comply with local Know Your Customer (KYC) rules. 

US Bank Secrecy Act

“For the company to do this, they must consider the securities regulations when issuing these NFTs,” said Max Dilendorf. He is a partner at New York City-based Dilendorf Law Firm. 

The highest priority [for the US agreement] complies with the US Bank Secrecy Act. You cannot sell anything to anyone without knowing who they are, let alone the real estate traded in the secondary markets.”

“There’s a lot to unlock; imagine I get an NFT of a property. What if there are three mortgages on the property, and one of them defaults? What if I’m sending a payment?”

It means a high level of efficiency for buyers. And for sellers or developers, it means doing extra work to handle legal details while making the process feel like a “touch of a button” for buyers. 

“The thing that will happen in the future is that we will need to do double duty,” said Nicholas Chavez. He is a Corcoran agent who also owns Silicon Titles, a tech company that sells real estate titles to Blockchain. “That means we need to shut down titles and escrow in a standard way and block on Blockchain.”

Aside from the general tax concerns that can accompany trading properties for Cryptocurrency, depending on how the NFT home sale is structured, the result could be a higher tax bill for buyers.

NFT to Track Property Ownership

“To use NFT to track property ownership, you have to wrap it up in a legal entity, usually an LLC,” Mr. Goldburd said. “The NFT is primarily a matter of ownership only through the right of a US entity. The problem is that you have tax problems and potential trade-offs for significant tax and transfer bills.”

Mr. Wood added: “I always find it useful to remind people that if they buy something with commendable Crypto, then buying something is also a sale of the Crypto for tax purposes. You have to pay taxes on the authority of Crypto.“

Searching For Seamless Sales Method

Aside from logistical and tax hurdles, Cryptocurrency enthusiasts are still anxious to find a way to make NFT home sales a viable reality and use them for potentially sensitive transactions such as the transfer of titles to Blockchain. Moreover, they hope it will be a safer, more efficient way.

“There’s technology to do that and do it probably safer for consumers than the county clerk’s office,” Mr. Heber said. “You read about people running these scams where they sell buildings they don’t even own.“

Mr. Goldburd added: “The only way to make this a norm is to amend the local land laws to allow NFTs to certify titles. It can be a great idea as many of the recording problems in companies will cease, and title insurance will probably be cheaper.“

Option of Using NFTs

Mr. Heber said some buyers had already explored using NFTs as a way for investors to dismantle and sell homeownership. Elsewhere, Mr. Chavez’s firm is testing a beta for an NFT sale that would state the right to refuse before buying the property. It gives the buyer the option to buy the home at a fixed price for a specified period.

Mr. Chavez said: “Buying an option on anything is a hedge against the downside and hope.” Therefore, the value of the real estate and the option term are the two main components of this agreement.

As needed, real estate as an industry will continue to slow down compared to other parts of the economy when adopting Cryptocurrencies and NFT technology.

For now, the structure of the real estate deal around the NFT comes with a much older date. “We’ve seen repeatedly that when a company announces that it will accept payments in crypto, people take notice,” Mr. Wood said. “I think it’s a little addictive.”