NFTs have rapidly been gaining in popularity, and as interest grows, many are beginning to look at the real-world applications of the technology. One such application captures the biggest asset class in the world – real estate.
What do NFTs have to do with Real Estate?
Non-fungible tokens are smart contracts that set the terms of sale and signify ownership over an asset. Sound familiar? Of course it does, because that’s how real estate contracts work too. A real estate contract sets the terms for the purchase, sale, and conveyancing (transfers of legal ownership) of real estate. All of this can be built into an NFT smart contract.
The ‘smart’ part of the contract is where we begin to see the extra value added by NFTs. Smart contracts are decentralized, digital and self-executing. This automation can improve efficiency, accuracy, and reduce the cost of real estate transactions, which are usually time-consuming and labor-intensive because of the sheer amount of verification and paperwork that needs to be processed with each transfer.
Smart contracts can process these transactions much faster, and avoid potential errors that may be caused by manually processing paperwork. You also won’t have to pay agents or other intermediaries to process the transaction. Using NFTs for real estate could therefore save you both time and money, and the headache that comes with navigating bureaucracy. It significantly simplifies a traditionally complex transaction, which has promising implications for liquidity.
Increasing the Liquidity of Real Estate
Perhaps the most exciting thing about NFT real estate is the increased liquidity it enables. Real estate is considered an illiquid asset, because it cannot be quickly and easily sold for cash. There are many reasons for this, including the difficulty of processing transactions and accessing the large amounts of capital required for purchase.
Comparatively, NFT real estate transactions would be near instantaneous, thanks to smart contracts. Tokenization of properties would also enable the fractional ownership and trading of real estate, thus opening the market up to a wider base of investors and increasing liquidity. One company that’s already facilitating this is Labs Group – a blockchain based real estate investment platform.
Labs Group’s first fractionalized resort investment
Challenges For Adoption
NFT real estate sounds very promising, but it presents a number of challenges that hinder widespread adoption. One challenge is that of security. NFTs are completely secure while held in a wallet on the blockchain, but exchanges aren’t as safe. Also, if you lose access to your wallet and its recovery phrase, there is no way you can reclaim those property rights.
Another challenge is that of regulation. There currently are no laws that govern real estate transactions through NFTs. Trading high value assets in an unregulated market can be risky, so it’s likely that until more regulations are in place, many won’t feel comfortable doing so.
However, that hasn’t stopped some NFT enthusiasts from testing the waters – TechCrunch founder Michael Arrington sold an apartment in Ukraine as an NFT for 36 ETH earlier this year. An NFT representing a 50% share in a St Louis home was also auctioned on the Mintable platform.
Michael Arrington’s NFT apartment
Virtual Real Estate
In June this year, a patch of virtual land in the blockchain-based online world, Decentraland, sold for nearly 1 million dollars. This is just one of many virtual real estate properties that have been sold as NFTs in the last year, in a trend that signals another step in the move to the Metaverse – a shared virtual universe.
While the real estate NFT market is still in its infancy, it’s being given a trial run in the Metaverse through virtual properties. This could help identify pain points for the physical market, and provide insights into how this potential use case of NFTs can be actualized.
Want to find out more about other applications of NFTs? Read our article on NFT use cases!