So you heard that someone sold their house as an NFT?
Or perhaps you’re curious about how NFTs could potentially transform the real estate industry.
You’ve come to the right place because we’ll help you understand the world of NFT real estate and the fundamental differences between digital or virtual real estate and physical real estate sold through NFTs.
This guide will teach you how Real Estate NFT Tokenization works today, how it could eliminate bureaucracy, and potentially introduce new business models to the world.
Let’s get started.
What Is NFT Real Estate?
NFT real estate is classified into two types: physical and virtual. Tokenization allows physical real estate ownership (such as a house in Virginia) to be linked to an NFT. However, virtual real estate is typically a plot of land within a digital world such as The Sandbox or Decentraland (also known as the “metaverse”).
It’s important to note that not everyone is talking about the same thing when they talk about NFT real estate or real estate NFTs.
Some may be referring to a physical real estate sold as an NFT, while others may be referring to digital real estate within virtual worlds (also known as the “metaverse”).
This is an important distinction because the motivations for NFT houses and plots of land within a game are fundamentally different.
In the following sections, we’ll explain how these various types of NFT for real estate work and what the benefits of each are.
- What Is the Process of Virtual Real Estate?
- How Do Non-Financial Transactions Work in Physical Real Estate?
What Is the Process of Virtual Real Estate?
Virtual real estate refers to plots of land or buildings within virtual worlds where people spend a significant amount of their leisure time. These properties can be obtained by cryptocurrency exchange software for the associated NFT. Depending on the virtual, these properties may include monetary benefits.
This article’s primary focus is on NFTs that are linked to physical real estate.
However, let us first define digital real estate or metaverse real estate.
Humans are spending an increasing amount of time online since the advent of social media. Social interaction within online communities of like-minded people has become far more convenient than in-person for many people. While opinions on the metaverse differ, it’s safe to say that these virtual online worlds will continue to expand as humans seek to communicate.
Minecraft, Roblox, Decentraland, The Sandbox, NFT Worlds, and other popular platforms for such virtual worlds include many others.
And, believe it or not, you can buy plots of land within these worlds.
Decentraland, for example, has 90,601 individual plots of land that can be purchased with their native currency, MANA.
While this may seem absurd, do not underestimate the number of people already spending time in these virtual worlds.
You can buy digital ad space within them, and some people make money by acquiring valuable ad space through NFTs.
Let’s look at some real physical property that has been tokenized as NFT real estate.
How Do Non-Financial Transactions Work in Physical Real Estate?
You can tokenize physical real estate as a whole or in fractional ownership. To do this, “wrapping” the asset in a legal entity is required, with the entity’s right. Ownership of an entity can be represented by an NFT or a set number of tokens.
Real estate NFTs function in the same way as any other NFT.
They are purchased with cryptocurrency and stored in a digital wallet.
Many people, however, are perplexed as to how a physical asset can be linked to an NFT.
This is a reasonable question because when you purchase an NFT, you are merely purchasing a digital asset on a blockchain.
There are the following methods for tokenizing real estate:
- Tokenization of the Entire Asset (EA)
- Tokenization of Fractional Ownership (FO)
- Ownership in Fractions
- Tokenization of fractional ownership is simple and similar to crowdfunding.
Each owner may hold one or more fractional shares of the underlying real estate, depending on how the investment is structured.
NFTs or regular tokens can also represent these shares.
Websites such as JuiceBox already allow large groups of people (e.g., DAOs) to pool their funds and bid on assets together.
This has been done with well-known artwork (AssangeDAO or ConstitutionDAO) and can quickly be done with real estate.
You’d probably have to encase it in a legal entity, which isn’t uncommon and necessitates the tokens being registered with the SEC.
The Entire Asset
However, tokenizing an entire asset is a little more complicated.
Currently, most developed countries structure and document real estate ownership through a deed’s office.
This works only if the actual property deed is converted into an NFT.
Legislators could pass legislation establishing a newly regulated asset class that allows deeds to exist in the form of an NFT.
However, for the time being, this is not an easy task.
Right now, the only way to do so is to “wrap” the real estate in a legal entity and create a single NFT token representing ownership in that entity.
And guess what, someone did exactly that.
The First NFT-Sold House
In February 2022, the first successful sale of a US-based house as an NFT was announced. Leslie Alessandra paid $650,000 for her home in Gulfport, Florida. Propy, a prop-tech company, facilitated the transaction.
A California real estate broker attempted to auction off a piece of property as an NFT in April 2021.
Because he failed to attract any bidders, the world assumed it was a terrible idea.
The fact that the minimum bid was set at $2 million, significantly higher than the property’s market value, contributed to the problem.
However, as a real estate NFT, the prop-tech company Propy facilitated the first US-based home sale in Florida in early February 2022.
The Gulfport home drew over 7,000 bids and was eventually purchased for $650,000 by real estate NFT.
It should be noted that this was the type of “Entire Asset” tokenization that we discussed earlier.
The purchaser of the NFT will become the owner of an LLC, the sole asset of which is the house.
Of course, the necessary paperwork for the transfer of the LLC’s ownership must still be completed in the real world.
Let’s say it’s still early.
How to Use Real Estate NFTs as a Loan Security
NFTs with a market value can be used as collateral to secure a cryptocurrency loan. Real estate NFTs are technically capable of doing the same. It can be used to back a loan as long as the NFT and its underlying asset provide sufficient value.
NFT loans are one aspect of NFTs that many people are unaware of.
We’ve previously discussed NFT-backed loans, but these have always involved NFT collectibles that exist solely in the digital world.
Nonetheless, because they are valuable to many people, it is possible to use platforms like NFTfi to obtain a short-term Ethereum loan and use an NFT as collateral.
The exact same thing could be done with NFT real estate.
If the property still has a mortgage on it, there are additional complexities, but the same logic should apply in principle.
Conclusion
Many people assert that NFTs cannot be linked to physical assets.
True, legislation still has a long way to go before providing sound regulatory frameworks for asset tokenization.
It is, however, completely false to say that it is not possible today.
Tokenization is feasible; however, additional structuring is required to make it compatible with the “real” world.
We believe that real estate is one of the industries that will benefit the most from NFTs and that some incredibly innovative business models will leave many people speechless.
We want to help you learn as much as you can about the upcoming NFT revolution. We guide you through the fascinating new world of non-fungible tokens and demonstrate how you can incorporate White Label NFT Marketplace into your business.
