Today’s Newsletter is an original piece of content on the potential of on-chain real estate and the progress being made in this field.
Read on to learn more about global real estate regulation, how tokenization of properties might work, and more.
Different nations around the world have huge variances in real estate laws. Even individual states in the U.S. differ greatly in how title law works. As most Americans use financing with a bank or lender to acquire enough money to purchase a home, some states bestow the lending institution with the title of the home, while others permit citizens to borrow money to keep the title, and permit the lending institution to claim a lien against the property. Some countries don’t even allow their citizens to technically own property outright, purchasing land acts as a lease that lasts 70-999 years
But what does this mean in relation to NFTs, and the potential for tokenized real estate?
Not unlike how REITs (Real Estate Investment Trusts) collectively own many properties and divide the equity into shares which are then distributed amongst the markets, one idea behind tokenized real estate is that individual homes could be made more liquid through tokenized fractionalization of equity. Even whole NFTs still provide a much more liquid way to transfer property without as much friction from realtors and brokers, not to mention the hefty fees they can charge.
It has been generally assumed by many that the stringent U.S. real estate regulation prevents any sort of NFT integration in the real estate markets. But how true is this?
Earlier this summer there was actually an interesting example of real estate being listed for sale as an NFT. Okada and Company, a U.S.-based realty group, listed a commercial New York retail building on Opensea. The listing description clarifies the following: “Due to the nature of real estate sales, the sale of the NFT does not warrant the completion of the real estate transaction, or reflect the transfer of the deed or title”.
Because the traditional real estate closing ceremony must still be honored for the title to be transferred, purchasing this listing is akin to just initiating the purchasing process with an ETH offer, rather than actually being able to buy property conveniently on Opensea. Purchasing this NFT is not legally binding.
Many lawyers actually advise against this type of activity in U.S. markets. Because there is little U.S. regulation on this matter, complications could arise if a buyer is parted with his ETH, but does not end up actually continuing with the transfer of the title.
This is an interim solution, although it is clearly flawed.
Its success depends on there being a reputable intermediary broker that sellers and buyers trust to navigate the murky process correctly. This temporary technique also doesn’t make sense for the majority of people. Because both parties still have to engage in traditional closing ceremonies, the sale of the NFT really is just a more convenient way for people to place a quick cash offer with cryptocurrency from anywhere in the world, without having to be physically adjacent to the property.
Currently, only the very wealthy can or would be willing to make this kind of transaction, and it just doesn’t benefit many people, especially considering there is no kind of financing integrated with this early stage ‘tokenization’.
In what situations can NFTs representing real estate actually work?
Enter the commonwealth countries, a large collection of over 50 nations that were once under the control of the British empire.
While these nations are similar in that they were once controlled by the U.K. to some extent, their individual property laws often vary incredibly, more so than individual states in the U.S. However, the main uniting factor in these global real estate markets is the idea of common law, law upheld based upon the precedent of previous rulings.
U.S. real estate law has evolved over the years across the 50 states while commonwealth law has changed much less. In most U.S. states, submitting an offer on a property is actually considered binding to a degree, and the buyer cannot just back out once this process is initiated if the selling party wants to proceed.
Commonwealth countries have a more flexible process with different stages, each providing different opportunities for parties to terminate the sale.
This flexibility allows for the potential of a real estate NFT to mean more than it currently does under U.S. law.
Under commonwealth law, purchasing an NFT can be seen as purchasing the right to initiate the exchange of the title. This more straightforward NFT purchase to title deed redemption eliminates the issue the U.S. real estate markets currently face on this issue, which is that buyers are transferring their ETH to another party potentially without any sort of guarantee that a sale will or can even go through. The traditional U.S. cash offer process which locks a buyer into purchasing to an extent does not apply to the purchase of NFTs with ETH.
Innovators in the tokenized real estate space, including CitaDAO , RealT, and SolidBlock do their best to abide by the current regulations and focus on how they can push the integration of blockchain and real estate forward in the jurisdictions that will allow it.
SolidBlock aims to provide TaaS (Tokenization as a Service) for real estate, with the goal of reducing management costs and making properties more flexible for real estate owners.
RealT is focusing on providing global and accredited U.S. investors with a way to purchase tokenized, fractionalized US real estate in increments as small as $50. They also have enabled users to borrow against or lend their fractionalized property tokens using their dApp.
CitaDAO focuses on servicing commonwealth nations, where regulation is more clear. The CitaDAO dApp allows users to access yield farming and single-sided staking with fungible real estate tokens. The protocol specifically uses a 2-way bridge between the Real Estate Token, and the title (pictured below). The property seller can verify ownership and bridge their real estate on chain by minting an NFT representing the right to claim the title. Future buyers of the token can redeem it for access to the property and title deed, de-tokenizing the property and allowing the buyer to use it as actual real estate. Utilizing a trusted law firm as an intermediary allows for assets to be bridged on and off chain in the corresponding stages of the transaction.
A lot of progress involving real estate as NFTs is dependent on more regulatory clarity. Once this comes, this sector of crypto can move leaps and bounds and become one of the most impactful areas in DeFi. But until then, innovators and contributors must do the best with what they are given, and maximize the potential for tokenized real estate as current law allows, accelerating the people’s desire for favorable regulation in the process.