In March 2021 a real estate investor & blockchain startup founder bought a nondescript Florida condo for $250,000. Fast forward eleven months and it sells for $654,000. It is the first transfer of U.S. real estate as an NFT. Realtor.com lists the sale as 66% above nearby property values suggesting a $260,000 premium. 3,000+ people signed up for the auction with coverage from Coindesk, CNN, Fortune, etc. The sale is shaping up to be a watershed moment for NFT’s entrance into real estate.
NFT Definition: for real estate, a non-fungible token (NFT) is essentially an identification number and custom ownership contract for an asset. “Minting” or creating an NFT allows you to represent a digital or physical asset in the blockchain. This then enables the asset to gain certain blockchain benefits like an easy transfer of ownership, access to crypto funds and apps, fractionalization, permanent and public record of events, etc.
Why is the real estate community excited about NFTs?
Let’s break the question into three areas seeing significant activity:
- Transactions
- Mortgages & Equity Loans
- Ownership Securitization
These financial services traditionally come with expensive bureaucratic friction that leaves consumers stressed out and worse off. The poor user experience and high margins have accumulated a risk of disruption, to the sector's alarm.
Transactions
In each property transaction, the parties can expect 10% of the sale price to get consumed in the closing. ~80% of this cost is at risk of redundancy in NFT-powered transactions happening today. These are fees related to the agent’s commission and line items like “title insurance,” “title search,” “recording fees,” and “closing survey.” NFTs are leveraging the blockchain to make the transaction and property ownership history indisputable. One can imagine a blockchain platform that, in addition to connecting buyers and sellers directly, automates the ownership change-related tasks. Also, listing platforms like Zillow gain ground in their years-long desire to skip agents as transactions are simplified.
Let’s pretend regulatory blocks are lifted and startups begin calling the shots. Now, NFTs / blockchain enable the transfer of property between parties in seconds, rather than weeks. The transaction may cost as little as the blockchain gas fees, lower than $0.01 on many chains, rather than 10% of the property’s value. The transaction would feel like sending an email, simply transferring an NFT from your digital wallet to another contingent on crypto payment. The record of ownership on the blockchain would be indisputable and all future financing and income distribution related to the property could be done automatically and in proportion. While this might seem far-fetched, Sweden is already gearing up to do this.
Mortgages & Equity Loans
“The natural endpoint of blockchains and NFTs — the golden promise of Web3 — is that every aspect of human life, as recorded by computers, will be collateralized.” — The Atlantic. This securitization of everything trend, as it is also known, is happening in real estate. Easy securitization greases the treads to receive or invest capital directly with people, platforms are replacing brokers. In 2022 U.S. banks are paying an average of 0.06% on savings accounts. Banks then loan out this cash to mortgage borrowers for a 2022 average of 3.22% and front-load the interest on those loans. As Jeff Bezos said famously to traditional retailers, “your margin is my opportunity.”
NFT mortgage companies like LoanSnap are crowdsourcing investors to finance mortgages. This is done by “wrapping the lien on the home, while the protocol then lends against the NFT.” LoanSnap’s platform / protocol is replacing the broker bank. “Because of the efficiency of the blockchain and the removal of all the processes and many people, users of the Bacon Protocol [LoanSnap] get the majority of the return, about 2–3% vs 0.1% if you kept that money in a savings account.” This compressed margin allows more homeowners to refinance for better results, and better returns for mortgage investors, thanks to NFTs.
If you buy a $200,000 property with a 20% downpayment, you have $40,000 in equity at closing. As the property appreciates and you pay down the mortgage your equity increases; any dollar that the home is worth that is not owed to the bank is your equity. It has long been difficult to get access to this value. One method is through a home equity loan, which takes about a month to close and costs between 2–5% of the total loan. Figure, an SF blockchain lending company, is building the foundation to skip banks in home equity withdrawals. The company has raised $1.6b and custom-made the Provenance blockchain to meet this end. Mike Cagney, the CEO of Figure, puts it simply, “it costs us significantly less to originate loans on blockchain.”
Using NFTs to efficiently lend against assets is happening across the blockchain. NFTfi, an NFT-as-collateral lending platform, issued a $1.4m loan against a borrower’s NFT art equity. Repayment on the loan is due in thirty days with a 9.69% APR, not great terms as NFT art is risky. We are at an odd moment in blockchain’s trajectory when lending against artwork eclipses that of real estate. Real estate is the largest source of collateral in non-blockchain lending. If the world still makes sense, it will eventually take the pole position on-chain as well.
Ownership Securitization
Mortgages are being securitized as NFTs, and so are the properties themselves. There are a few reasons one might want to do this but a particularly exciting one is to raise funds.
Raising Funds: There is a whole world of securities regulation and strategies to exchange equity for capital. A licensed securities lawyer is best equipped to comment of which I am not… but 😉 you may consider a limited or full registration with the Securities and Exchange Commission (SEC). You typically won’t be able to publicly solicit investments. That means no posting on LinkedIn about your great investment opportunity. An alternative, to enable public solicitation, may be to only accept accredited investors into the deal. The offering will cost thousands to set up making it uneconomic for your usual rehab deal. This is where companies like Vesta Equity are stepping in. Vesta is, “Enabling property owners access to the value in their property without loans and property investors the chance to build a portfolio of fractional residential real estate NFTs.” Where LoanSnap securitizes mortgages as NFTs, Vesta Equity does the same with the property itself. This same process is being used to securitize real estate funds (think capital for multiple future deals rather than one deal right now) by tZERO, here’s their investor deck.
Where this goes
The highlighted companies and others are chomping at the bit for legal clarity on what is allowed. We have yet to receive a cohesive regulatory framework, but we are heading in a favorable direction. Here are four hours of the House Financial Services Committee earnestly learning how to make sensible rules (yeah, I watched it all). Lawmakers across the aisle, and in key agencies, are aware of what is at stake — nothing less the position of the U.S.-led global financial system. Most recently, this system enabled the effective capture of $600b+ in Russian foreign reserves during their invasion of Ukraine. In a world in which people opt for a currency that is not the dollar, or tied to the dollar like many stablecoins, this power ebbs. As long as helpful regulation continues to unfold, the benefits of the blockchain and the dollar can commingle via dollar-backed stablecoins. But in the event of a global shift to a non-dollar currency, say Ethereum, the thought is that the U.S. might as well have the new jobs and expertise. The importance of getting blockchain regulation right is more apparent to lawmakers now than ever.
However, it won’t be an easy path. Blockchain rules are moving in fits and starts as new lawsuits establish precedent, like BlockFi’s $100m settlement with the SEC. BlockFi’s CEO described the gargantuan settlement as a win for “securing regulatory clarity for the broader industry and our clients.” Big-ticket securities law violations are the focus of government action but the new rules will help inform the broader industry. In the long haul, we are at only the beginning of NFT’s impact on real estate.