In late May, the news broke about a world-first for blockchain technology: An apartment in the Ukraine would be sold at auction as an non-fungible token (NFT). The company making all this possible, Propy, had previously used this same property to demonstrate the power of the blockchain, facilitating the original sale in 2017 using a Smart Contract.
So, when the apartment was once again offered to the public, it raised a lot of eyebrows. It was purchased via auction by Devon Bernard, who paid 36 Ether (the cryptocurrency generated by the Ethereum protocol), equivalent to $93,429.72, according to Propy.
This successful housing sale came on the heels of an April attempt to sell a duplex in Thousand Oaks, California, via the OpenSea platform. That particular property had an opening bid of 48 Ether (about $117,000), but it failed to find a buyer for the NFT of a video of the home, packaged along with the real estate itself.
These two different experiences with NFTs and real estate in 2021 have brought a great deal of attention to the world of NFTs. Although generally used as a method of buying and selling digital items and tracking them on the blockchain, the potential that NFTs have in the real world is clearly not being lost on people in the real estate industry.
NFTs for real estate transactions
Since there has only been one successful real estate transaction that utilized an NFT, and it was in the Ukraine, it remains to be seen how well this technology can be adapted to meet the variable needs of this kind of real-world deal on a global scale. Propy describes the transaction more as the purchase of a business, less as a pure real estate purchase.
"The ownership of the property was actually held and recorded in Ukraine as a U.S. LLC," explains the site. "The auction winner became the owner of the NFT that gives the rights to the LLC, with Arrington [the seller] signing proprietary-developed legal papers for NFTs to transfer ownership to all future buyers."
The duplex transaction on the Open Sea platform, on the other hand, was designed as a simultaneous auction for both digital and real property (which may explain why it didn’t sell), though the details of how the new owner would take title are scant. Since no one had to test the real-world mechanics of this particular NFT purchase, it’s hard to even speculate on what the endgame would have looked like. But, if it was simply an NFT that identified the items and created a record in the blockchain, along with the traditional paperwork required for a real estate transaction, it could have been an early step in using NFTs in day-to-day real estate purchasing without any loopholes required.
NFTs, blockchain, and chain of title
Generating an NFT only requires that you have an item that you’d like to individually identify forever. It can be a unique item, like a piece of real estate, or one copy of many identical items, like digital art. Each NFT is then recorded on the blockchain. This record follows the item (digital or real) throughout its life, providing an easy way to track ownership and other information. In theory, this is actually pretty handy for real estate transactions.
When you buy a piece of real estate in the United States (and in many other places), a title search is routinely performed. This digs down to the dirt to find out who has owned the property over time and if any of those people or their descendants might have a legal claim to it still. This is a big part of what takes so long even when you’re closing on a cash deal -- you still have to check the chain of title.
A presumably clean chain of title means you can get title insurance, which is handy should the title search miss something or there’s some other sort of property dispute that would risk your purchase or ownership status that might not have been properly documented, like an unrecorded lien. And that’s where the blockchain can be handy for real estate transactions: establishing a bomb-proof chain of ownership for both buyer and seller. Although properties that have a long history still will have some small risk of a clouded title, new construction properties being registered on the blockchain to establish their ownership records would experience a much simpler process.
The Millionacres bottom line
Right now, if you have the right help, the right platforms, and the right marketing plan, it’s possible you could sell a piece of real estate as an NFT. However, the stars really have to align for everything to go just right, and there are a lot of dangling legal and tax "ifs" out there, since you will absolutely be blazing new trails.
If you have a property you can’t sell without the gimmick, by all means, give it a go. But, if you have a property that you know has a solid value and demand, this is probably not the time to be experimenting with turning real estate into NFTs. It can pay to be an early adopter in some situations, but this one is not one of them.
While it will be great to be able to examine chain of title using blockchain entries (and I do believe this will be the case in the not-too-distant future), using a hybrid system of more traditional ownership transfers and record-keeping using the blockchain is probably a much more likely future for the industry. There’s a lot of legal minutiae that will need to be figured out before real estate as full blown NFTs becomes a reality.