February 10 may go down as a momentous day in real estate history.
That’s when a 70-year-old brick home in the St. Petersburg, Florida suburb of Gulfport sold for the equivalent of $654,310, where the asset exchanged was represented by a non-fungible token.
Worldwide sales of non-fungible tokens, better known – of course – as NFTs, catapulted from $94.9 million in 2020 to $24.9 billion in 2021, according to an analysis of 10 different blockchain ledgers by DappRadar. In the past year, NFTs pole vaulted from mostly commodifying art and digital assets to an array of spheres including – very preliminarily – real estate.
The creation of the NFT real estate market thrusts a spotlight onto a Silicon Valley company specifically throwing itself into real estate, blockchain and NFTs. It also gives real estate agents ideas.
“Absolutely, I will offer an NFT option to sellers within the next year,” said Richard Hopen, a Compass agent in Short Hills, New Jersey. “It’s a great marketing tool for the right type of listing. NFTs are new and associating one with a house is likely to attract media attention.”
NFTs in real estate are, for the moment, a grossly impractical novelty act that, publicity aside, offer tenuous benefits to agents. But, to many, the intersection of NFTs and real estate holds great promise. And for homebuyers and agents alike, they raise the important question about what precisely is the problem NFTs and the blockchain claim to solve.
How a real estate NFT works today…
On a Facebook video chat, Amy Heckler of Heckler Realty in St. Pete’s Beach, Florida answered real estate agents’ questions, surrounded by a white and red Heckler Realty banner and two office plants. Heckler was the listing agent of the auctioned off Gulfport home. As she catalogued her experience, bubbling excitement around NFTs transformative thrall slowly subdued.
The Gulfport seller, Heckler explained, created a limited liability company that held ownership of the home. In creating a Delaware LLC, the Florida seller and Heckler joined forces with Propy, a five-year-old company headquartered in Palo Alto, California.
Propy then guided the seller into minting the LLC as an NFT. NFTs are digital tokens providing a certification of authenticity that you are acquiring the rights to what an NFT represents. For example, purchasing an NFT of a JPEG of a painting transfers the intellectual property rights of the painting. For the Gulfport home, the NFT did not represent the property itself. It represented LLC ownership of the property.
Next Propy auctioned off the NFT. Bidders were required to be cash buyers, or more precisely cryptocurrency buyers, or – more precisely still – have a virtual wallet on the Ethereum blockchain.
Unlike currencies issued by a country’s government, cryptocurrency is digital and has no central administration. A blockchain ledger facilitates and records cryptocurrency exchanges. Bitcoin is perhaps the best-known cryptocurrency. But Ethereum was the first with a blockchain that enabled NFT sales.
“Propy is blockchain agnostic,” said the company’s CEO, Natalia Karayaneva. Still, Propy used Ethereum for the auction, where the winning bidder used the cryptocurrency Ether.
Generally, listing agents extract a commission from the homeseller and then split it with the buyer’s agent. In this particular sale, Heckler worked out an arrangement to receive the commission distribution after the winning bid.
But the NFT transaction between buyer and seller does not necessarily put money into the seller’s agent pocket. For now, officials with Propy acknowledged, the commission is a “case-by-case solution,” adding another layer to the process.
“Could you set up a NFT sale where there are multiple parties involved in the transaction?” said Hopen, the Compass agent who writes the “Crypto News for Realtors” newsletter. “That could be a solution. But we’re making stuff up as we go along. For now, there has to be some type of separate agreement for the commission.”
Meanwhile, all parties had another issue to deal with. The NFT representing ownership of an LLC representing ownership of a house is 100% legally meaningless. Pinellas County in Florida is in charge of tracking who owns the Gulfport home in question. And Pinellas County, like every other U.S. county, recognizes not NFTs in recording property ownership but instead title deeds.
In a forthcoming paper for Florida Law Review, law professors Juliet Moringiello at Widener University Commonwealth and Christopher Odinet at the University of Iowa studied NFTs potential in real estate. What the paper wryly notes is that while the use of non-fungible tokens may be novel to the art economy, they have existed in real estate since the Henry VIII-led English government of 1536 created the deed. The deed then, as now, is a token, be it a piece of paper or PDF that represents the transfer of land.
“Blockchain technology is probably best to record ownership interests for intangible assets associated with intellectual property rights,” Moringiello said in an interview. “But with real estate, we already have a way to signal ownership.”
So, the winning bidder worked with Propy and Heckler in also transferring the Gulfport home’s deed. Instead of creating a simpler way to transact real estate, “The NFT is kind of acting as a redundant parallel proof of documentation,” said Christopher Wilmer, professor at the University of Pittsburgh school of engineering who studies blockchain.
A deed transfer often includes the new owner ensuring they are the property holder through title insurance. But not a single Florida title company would touch the Gulfport sale.
“A title company cannot handle this kind of transaction as an escrow account,” Heckler said – adding, “Buyer beware.”
…And how it may work tomorrow
If the use of NFTs in real estate is mystifying to many, it seems self-evident to Natalia Karayaneva, the founder and CEO of Propy. Before starting Propy, Karayaneva ran a real estate investment firm in Bulgaria for 15 years and earned a master’s degree at the University of Oxford in sustainable urban development.
In a Zoom interview, Karayaneva coolly pitches the virtues of Propy, and corrects erroneous premises from a stumbling reporter.
“We understand the process very well,” Karayaneva said, in reference to the real estate sale. “We do all the heavy lifting.”
Propy touts that they can make the real estate sale instantaneous as well as secure through blockchain, and cheaper by weeding out paper-pushing middlemen. There are “so many problems” with the current process, Karayaneva said, including “short-staffed local governments” and “title companies getting a piece of the pie.”
The average time in the U.S. between signing a contract to buy a home and purchase closing is 50 days, according to a September 2021 report from ICE Mortgage Technology. Propy envisions NFT deals on blockchain making the buying and selling of homes instant and immutable. It’s a complete overhaul of the home sale process, compared to, for example, iBuying companies speeding up one side of the deal.
To some, Propy’s vision is exciting.
“Change is coming,” said Jim Haisler of Heartland Realtors in Crystal Lake, Illinois. “NFTs will be part of the evolution to something different, something better likely. It’s time paper deeds go away, anyway.”
Another believer is Merav Ozair, a professor at Rutgers University who focuses on blockchain and cryptocurrency. Ozair sees two major but not insurmountable hurdles to NFT real estate sales.
The first: “You need the counties to come on board and be part of blockchain.”
Of the over 3,000 counties and, in the state of Vermont, municipalities who record deeds none use a blockchain platform. Propy tried a pilot program with the city of Burlington, Vermont to put deeds on the blockchain, but “is not actively working on it right now.” Still, the company contends, blockchain technology “is ready to be utilized by counties and that’s definitely needed.”
Perhaps “cash-strapped” county governments may yet use a blockchain platform on a pilot basis, Ozair said.
County deed recording can be archaic, acknowledged Steve Gottheim, general counsel of the American Land Title Association, the main trade group for title companies, with counties slow to digitize records. Historic records are recorded, “On big, old ledger books that are done on paper.”
While Karayaneva described the title industry as an opponent of NFTs, Gottheim said that’s not necessarily so. “If blockchain proves to be a better way to store records, our members are the ones who will likely put it in place,” he said.
Daniel Wallace, the general manager of lending at Figure, a company that uses blockchain for mortgage products, is skeptical that there’s political appetite for county’s relenting on deed recording. But, Wallace noted, monolithic property systems are in other countries.
“Canada, Australia and the UK have what’s called a land registry,” he said. “Whatever is in that land registry dictates who the owner is who’s entitled to the piece of property.”
The second obstacle is what Ozair calls “interoperability,” meaning NFT real estate records from different blockchains must align. In other words, a seller cannot NFT a deed of 123 Elm Street on both Ethereum and, for instance, OpenSea blockchains. And the buyer looking for the 123 Elm Street NFT must know where to search.
“We need to agree, as a society, on which blockchain we’re going to check for real estate NFTs,” said Wilmer of the University of Pittsburgh. “Checking the wrong blockchain would be akin to looking for a San Francisco property in Tokyo’s title deed database.”
Like Ozair, Wilmer said it’s conceivable governments agree upon using certain blockchains for real estate.
“I think a practical way forward is to maintain a dual system, where initially the traditional title deeds are deemed authoritative and NFTs are used as supplementary legal evidence,” Wilmer said. “Over time, as trust in the NFT-based approach grows, the roles can switch and the traditional deed documents can become supplementary evidence.”
…Or, how it may not
Over President’s Day weekend, Devin Finzer, the CEO of OpenSea, which bills itself as “the largest NFT marketplace,” acknowledged that the equivalent of $1.7 million in NFTs were swiped by thieves who tricked OpenSea users into signing contracts allowing NFTs to be transferred without payment.
It was the latest in a long series of NFT thefts at OpenSea, though Finzer noted the crime was not as bad as first thought. “Importantly,” the CEO tweeted, “Rumors that this was a $200 million hack are false.”
In his October 2008 white paper heralding the arrival of Bitcoin, Satoshi Nakamoto (a presumed pseudonym) argued for the use of a blockchain to thwart third-party tampering. The ledger should “time stamp transactions by hashing them into an ongoing chain of hash-based proof of work, forming a record that cannot be changed without redoing the proof of work.”
As use of cryptocurrency has grown from its Great Recession origins, the seductive idea has persisted of blockchain creating an indelible transaction record while cutting out the deal’s fat.
An NFT record should in theory be impossible to tamper with, Wilmer said, compared to a county title deed that could be fraudulently edited. But if the recording of an NFT transaction is hard to alter, NFT thefts themselves “are happening a ton,” said Anthony Lee Zhang, an assistant professor at the University of Chicago, who studies blockchain.
These thefts can include sophisticated hackers deviously creating false certifications of authenticity. Or they can be depressingly simple. “People are just losing their passwords to their blockchain wallets all the time,” Zhang said.
Real estate, Zhang said, creates a new terrain for theft. “You might mint an NFT of the LLC of your property,” Zhang said. “But I can go into Delaware court and take a picture of that LLC and mint it myself.”
Paradoxically, the professor added, the immutability of the blockchain ledger makes matters worse. And with real estate, hackers are not instantly transacting a stolen JPEG of a painting. They’re taking over ownership of your house. “Do you really want to make it easy to buy property?” Zhang said. “The current friction is in some sense a security feature.”
Zhang’s point harkens to not just a potential NFT real estate economy, but debates in real estate over iBuying and what, precisely, would be disruptor companies are criticizing when they call a home sale slow and archaic.
The biggest reason home sales take almost two months to complete, Gottheim of the title trade group noted, is property inspection and mortgage underwriting.
A homebuyer closely inspecting their property before closing also does not strike most observers as a waste of time. Propy said it is not against the home inspection process. But it’s not clear if this inspection takes place before or after the NFT transfer.
Arguably the biggest X-factor to if real estate NFTs transcend gimmickry is integrating mortgages.
Less than 20% of homebuyers are cash buyers, Gottheim noted, and instead must borrow money. That means that so-called power buyers such as Ribbon fund a homebuyer’s crypto wallet, or the buying and selling of real estate on the blockchain is a playground for the wealthy.
Already, cryptocurrency is even more concentrated in the hands of a rich few than traditional currency. It has been reported, for example, that about 100 individuals, so-called whales, own 18.5% of Bitcoin currency.
Propy believes blockchain real estate sales are on the path to becoming accessible to homeowners who must take out a mortgage.
“As more lenders begin to offer crypto mortgages, we will be able to integrate them into the NFT process,” the company said. “We do hope to offer this option this year, and it will be handled similarly to any other auctioned property, where the buyer has to receive financing in advance of the auction. One option is using their crypto holdings as collateral.”
But even those who operate their business on blockchain are skeptical. Figure Technologies, a San Francisco-based company, largely created the blockchain platform Provenance. Figure mints tokens of the promissory note of a mortgage, and uses Provenance to service and securitize mortgages.
But Wallace of Figure said that technology and U.S. law is not there for using blockchain to both exchange property and enforce a 30-year mortgage loan.
“When you see art work or music, they’re trading based upon copyright law or trademark law,” Wallace pointed out. “But that is different from the legal enforceability of property rights or promissory notes. We cannot use copyright or trademark law to collect money on a loan.”
Like Rome, Menlo Park was not built in a day. Buoyed by its first auction, Propy has organized a crypto real estate conference in Miami this week. And it is putting together other beta tests of using NFTs.
“We’re looking at properties in Chicago, San Francisco, and Miami,” Karayaneva said. “We want to make sure that all these properties are in clean, attractive areas.”