You likely know that NFTs are gaining more attention. The video game and art industries are driving these digital assets forward. Blockchain is also finding its way into every sector of public life. This is why we have to cover the developments of NFTs for real estate.
A Brief Overview of NFTs
The non-fungible token, which we refer to as an NFT, is a blockchain token representing either a tangible or intangible asset. Once stored on a public blockchain, the registration of an NFT results in a unique title deed of sorts. Each NFT possesses these qualities:
- Identifiable and unique
- Not duplicatable
- Not falsifiable
- Exchangeable
Based on these attributes, those who own an NFT can attest their ownership be it physical or virtual. The NFT represents a unique title of ownership that can be bought, sold or exchanged.
Today, NFTs are central to gaming and the metaverse. The art industry has also found a way to democratize itself and protect artworks against illicit reproductions. Lately, developers have come to realize the advantages of NFTs in real estate.
Now, you might already know about Decentraland and The Sandbox where you can buy “land” in the form of NFTs from the metaverse. In this article, however, we want to discuss NFTs that back the actual plots of land and homes that human beings in the real world inhabit.
The Tokenization of True Real Estate
As stated above, NFTs establish a digital title of ownership for a physical or non-physical asset. The same principle is as easily applied to the field of real estate where ownership is among the leading issues. The link being made between NFT and real estate today deals with tokenization.
To tokenize real estate, developers simply assign physical property to one or more virtual real estate NFTs, which will be registered on an active blockchain. Traditionally, owners of real estate are identified by a notarized deed. In the case of real estate NFTs, property ownership is expressed through an NFT, which gets publicly authenticated on a blockchain.
Keep in mind that the real estate NFT marketplace has nothing to do with the virtual metaworld. The metaverse is a fictitious universe where you can buy and sell “space” in a fantasy land. When tokenizing real estate, however, you’re logging real assets on a blockchain.
Types of Real Estate NFTs
Here are two ways to tokenize real estate:
- Fractional Ownership (FO) Tokenization
- Entire Asset (AE) Tokenization
1. Split Tokenization
With fractional ownership, the asset is divided into several digital tokens.
A single asset can be split into tens or even thousands of NFT tokens. Each holder of these tokens, therefore, owns a share of the physical property. Now, if a property is made up of 1,000 tokens and you own 20 of them, then you own 2% of that physical property.
In this way, buying fractional ownership NFTs is, in some way, similar to buying shares in a real estate investment fund or an SCI company. The major difference is that real estate tokens are registered and authenticated on a public blockchain.
2. Complete Tokenization
With the tokenization of an entire asset, the entire property must be transposed into an NFT. This, however, is still difficult to achieve because of the complex regulatory environment that governs real estate investments. To date, regulations don’t allow actual deeds to be converted into NFTs, but only a copy of the deed can be recorded on the blockchain.
How Real Estate Tokens Works In France
Today in France, there are two main obstacles regarding virtual real estate NFTs.
Fully identifying the owner is essential for tax authorities to validate the transaction. In addition, no matter the nature of a real estate transaction in France, it must be registered in a cadastre. Blockchain is not yet accepted as a complementary or alternative solution to land registry.
However, the real estate NFT marketplace exists in many countries. These include the U.S., Germany, Switzerland, the United Kingdom, Luxembourg and Estonia. Though France hasn’t adapted to it, it could change its stance as other nations benefit and grow from real estate NFTs.
How Do Real Estate NFTs Work?
In practice, a real estate NFT is purchased like any other NFT, which is to say through cryptocurrencies. You must store the NFT on a wallet and purchase it with the right crypto.
Furthermore, when you hold fractional real estate NFTs, you also benefit from the profits associated with your share of ownership in the project. For example, if it is a tokenized rental investment, each NFT holder receives the rental income corresponding to their share.
As in classic real estate projects, the owner of a real estate NFT can keep their tokens or resell them to realize a capital gain on their investment.
Advantages of NFTs In Real Estate
So, do NFTs have a bright future in the real estate field? It might be difficult to say at the moment, but one thing is certain; real estate NFTs currently take a strong stance.
Tracing Property Titles
With real estate NFTs, the purchase of property is recorded on a blockchain register. This registry preserves a history of transactions that’s linked to a tangible good. With each sale, the blockchain records who is selling, who is buying, at what price and when.
In addition, the transaction recorded on the blockchain can easily be found and proven once it’s done. Thus, there is no risk of losing a deed of ownership or a certificate of authenticity. There’s no paper to store either. A property title is guaranteed by the blockchain.
Transaction Integrity
A key strength of real estate NFTs is the level of security they offer due to decentralization. Unlike a centralized register, the blockchain’s real estate NFTs are considered tamper-proof.
This means that you have no risk of your NFT token disappearing due to human error or a malicious act. Consequently, no one can delete your token from the NFT blockchain, which guarantees the longevity of your title, excluding new sales of course.
Keep in mind, however, that a high level of security isn’t guaranteed for all real estate transactions. When the ownership of shares in an SCI is transferred, the transaction is, in the best case, scenario recorded in a register kept by the company only.
It’s then a company record, not a blockchain entry, that serves to prove that you hold a title to the shares. It’s easy to understand that the loss of these contractual documents, following a human error or a dishonest act, is potentially problematic.
Boosting Real Estate Transactions
In general, investors choose to purchase properties close to where they live. This is partly because investors have little knowledge of other geographies. Proximity makes it easier to complete their transactions. Thus, traditional real-estate portfolios remain very localized.
With tokenization, however, investors can expand their portfolios into a wider market. Since properties can also be divided into smaller amounts, more people can invest. Additionally, property sales are no longer geographically limited since the transaction is decentralized.
Group Investments Into Real Estate
Binance
- Low fees
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Binance
In traditional real estate, the best properties are reserved for those with significant budgets or banking resources. Real estate NFTs break down the financial barriers that hinder smaller investors. This is because NFTs that fraction a property are more financially accessible.
Investors with limited resources can still access diverse property choices. This allows newcomers to start putting money to work and thus “get a foot in the door.” They can then grow their capital without having to carry a heavy burden of debt.
Reducing the Costs of Real Estate Transactions
In traditional real estate, there are long contractual procedures which involve different notaries, an agent and the likes. In addition to the time it takes, these procedures place a relatively heavy financial burden on the buyer and seller.
Ultimately, real estate tokenization can operate on smart contracts. These contracts are protocols that work through a blockchain. They collect information and automatically execute actions when defined conditions are met. For example, a smart contract can collect flight data from an airline and automatically compensate passengers who traveled on a delayed flight.
In the case of real estate transactions, smart contracts close deals faster and cheaper.
