Real estate NFTs on OpenSea are usually found under the category of virtual worlds: they’re metaverse assets after all. But the largest NFT marketplace now lists a real-world Manhattan property available for purchase in 26,500 Ethereum (just shy of $30 million). 

That cryptocurrencies could be used to buy real-world property in the $10 trillion real estate sector was a novel idea only a few years ago. But buying property with Bitcoin or Ethereum is the least interesting part of what blockchain can offer real estate. Though NFT technology that can verify ownership of digital assets, web3 has the potential to drastically change the entire process from behind the scenes.

Some countries, like the UK, are beginning to recognise NFTs as legal property, but strictly speaking, they cannot yet function as a title deed, since no legal system yet recognises them in that capacity. What distinguishes this JPEG NFT from all others is that, when sold, the token would come with the property in the photo. “Yes. You get the property after buying the NFT. Yes, you can live in the building. Yes, you can rent it out. It’s not just an expensive jpeg,” tweeted Chris Okada, president of commercial real estate company Okada & Company. Okada is not quite the first to sell real estate as an NFT – a German seller with the pseudonym Ugn-Ugn put their rural home, near Frankfurt-am-Main, on OpenSea in April 2021 (it’s unsold) – but he is early.

“It’s not just an expensive JPEG.”

— Chris Okada

Okada has designed the process to circumvent the legal quagmire. The JPEG would come with the property not because of a legal requirement, but in virtue of a bona fide commitment made by the company that the transferred funds would count for the funds necessary for the property’s legal transfer. It’s still subject to the necessary legal paperwork, like background checks, which is why the company advises the prospective buyer to make contact with them first. 

Since its listing on May 30th, the NFT has been viewed over 5,000 times. There has been “tremendous buzz,” Okada told Culture3, “but no real offers just yet.” The realtor is used to waiting patiently for a prospective buyer. “A commercial sales process takes months,” he explained.

What makes this development exciting is that, for years, one of the much-cited potential use cases for NFTs has been title deeds. Bringing NFTs to real estate can bring greater transparency (with all purchase histories stored publicly, onchain), accelerate the process (through digitisation and automating many of the steps via smart contracts), and globalising the real estate market (by bringing it truly online). In addition, by verifying unique ownership, bringing property deeds on-chain has the added benefit of preventing scammers attempting to insert themselves into foreclosure, loan, and purchase processes.

In 2019, Mishcon de Reya, the London Magic Circle law firm, collaborated with the UK Government and University College London to develop a distributed ledger technology prototype that would enable a digital transfer of a property which automatically updates the UK Government’s Land Register. Mishcon's blockchain prototype brought the transaction time down from 22 weeks to just 10 minutes.

But all of these approaches are currently in the pilot stage; no jurisdiction legally accommodates direct title deed transfers via NFTs today. “I think this would be one way to transfer ownership of properties. I am all for it,” Okada said. However, he accepts that mass adoption of NFTs as title deeds will take time: many steps have to be taken to get there, including legal and industry-wide changes to bring real estate transactions on chain, including governmants creating or regulating specific blockchains for the purpose.

Okada’s Manhattan property puts a JPEG NFT in the centrepiece, but it’s not the only way to transact real estate via NFTs. Propy is an American real estate company that’s sold three properties by representing their ownership in a limited liability company (LLC) and selling that as an NFT instead.

Following an initial sale in Kiev, Propy have completed a string of sales across the US, with an upcoming sale in Orlando, Florida. “What's exciting about this upcoming NFT sale is that it provides a small royalty to the listing agent and seller for future sales of the NFT,” according to Semra Dosevre, Propy’s marketing manager. 

When a property goes up for sale on Propy Marketplace, potential buyers have a pre-set amount of time to make offers. It’s all transparent, true to the web3 ethos. In the end, the highest bidder transfers the amount in cryptocurrency to the seller, and the NFT is transferred into the buyer's wallet in approximately 15 minutes. Earlier this year, South Burlington, a city in Vermont with around 18,000 people, began a pilot with Propy that could ultimately lead to the city putting the land registry entirely onchain. Speaking to govtech.com, City Clerk Donna Kinville said her office didn't do anything differently when processing the Propy deed; the company oversaw the entire blockchain recording.

Devon Bernard, an engineer at cryptocurrency exchange FTX, bought the world’s NFT property in Kiev through Propy. “It’s not only the first piece of real estate sold as an NFT, but also the first sold on a blockchain or smart-contract,” he told Culture3. He would have tried to buy it no matter where it was located, he said, adding that “it’s a special part of crypto history.”

His property, located in war-torn Kiev, may be “intact, damaged, or destroyed,” says Bernard, who has heard of destruction in the neighbourhood. But he isn’t concerned about the state of the property. “My primary concern is about the people, I would like everyone to be safe and happy.” If the property outlasts the war, he hopes to “offer short-term rentals for the property and let the web3 community visit.”

One idea that Bernard finds particularly appealing is the prospect of fractionalising the property, turning the non-fungible token into many smaller fungible tokens backed by the real-world asset. It would be fun if everyone could own a piece, he suggests, noting that it “would likely require considerable legal effort to ensure compliance with various regulations.”

“I believe crypto will eventually make real estate transfers faster, cheaper, and more secure and will increase accessibility and affordability via fractionalisation,” Bernard predicts. “The tech is ready, it will just take time for regulators to decide the appropriate safeguards.”

Unlike others who experimented with NFT real estate, Okada & Company chose not to go down the LLC route because. Okada explains that “taking over someone's LLC means that you inherit all their tax basis, any potential lawsuits, contracts with vendors, and so on.” He suggests that such a scenario could devalue a property in the real world by 20-30%. “The buyer would have to find an investigative company to do a search on any potential issues that the other LLC agreed to,” he said. “In the commercial real estate world, [the LLC route] is a big red flag. People do it to save on transfer tax and capital gains, but never get fair market value.”

Although bringing NFTs to real estate could potentially transform many aspects of it, some issues are likely to remain untouched. Many real-world issues like theft, vandalism or rental problems cannot be enforced through onchain contracts and Bernard anticipates that “you’ll still need to [use] the court system for resolving disputes.”

But the idea behind combining NFTs and real estate is not to bring every aspect of the sector onchain. Rather, it is to augment the process through specific technologies like smart contracts, blockchain, and NFTs, which reduce bottlenecks, improve transparency and security, and broaden accessibility and thus liquidity in the sector. Through this, web3 can leave a significant mark on the $10 trillion industry.

Mishcon's blockchain prototype brought the transaction time down from 22 weeks to just 10 minutes.