» NFTs and Real Estate: What is a Tokenized Real Estate

NFTs and Real Estate: What is a Tokenized Real Estate

By Tolu Ajetunmobi
— August 14, 2022
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There are a lot of things going on in the NFT world. We recently did a roundup of the most valuable NFTs. The least expensive NFT on that list was worth over 10 million dollars. However, there is more to NFTs than artworks.

People are now selling their homes as NFTs! This article will explain how NFTs work in real estate, their benefits to the real estate industry, and platforms for those who want to get started.

Who knows, your next home might be an NFT.

Let’s go!

What Are NFTs?

NFTs (Non-fungible tokens) are unique assets you cannot replace with another asset.

Our best example is comparing the US dollar bill and the Mona Lisa Painting. If you exchange a 1-dollar bill for another 1-dollar bill, you still have the same thing. This differs from swapping The Mona Lisa by Leonardo da Vinci for the Praying Hands by Albrecht Dürer. You don’t have the same thing.

The US dollar bill is fungible. The Mona Lisa painting is non-fungible. There are two kinds of assets in cryptocurrency – fungible and non-fungible. Fungible assets are like bitcoin. You can exchange one bitcoin for another and still have the same thing.

Exchange one non-fungible asset for another, and you have something entirely different.

What Is NFT Real Estate?

NFT Real Estate is real estate expressed as an NFT. There are two types: physical and virtual real estate. So, when someone mentions NFT real estate or real estate NFTs, you should ask if they are talking about physical or digital real estate.

There is a whole world of difference between them.

Physical real estate happens when you link a physical property to an NFT via tokenization where the NFT gets its backing from physical real estate.

Virtual or digital real estate means the real estate behind the NFT exists in the digital world,” the metaverse.” There are so many platforms offering real estate in the digital world. The two most popular are The Sandbox and Decentraland.

Our focus is on NFT linked to physical real estate, but we will briefly explore how virtual real estate works.

 

How Does Virtual Real Estate Work?

Virtual real estate exists in the digital world. You can purchase these real estate properties by buying the associated NFT. As long as you own the NFT, you own the property.

Some virtual real estate platforms allow you to rent your property and develop them as you would in the real world. The most popular platforms for buying, developing, and earning from virtual real estate are:

  • Decentraland
  • The Sandbox
  • NFT Worlds

The History Behind NFT Real Estate?

Real estate is one of the most significant asset classes in the world. Estimates put the value of all the world’s real estate at $326.5 trillion in 2020. However, only a relatively small world population participates and leverages real estate.

There are two reasons for this:

  • Real estate requires enormous capital: Most small-scale investors (which form the majority of the world population) cannot afford the money for real estate. They instead invest in other asset classes like stocks, bonds, and cryptocurrency due to their low-cost barrier.
  • Real estate requires extensive paperwork: The sheer amount of documentation and bureaucracy associated with real estate allowed for many shady dealings. The inefficient paperwork system and low transparency drive potential investors away.

There are many attempts to make it easier for investors to come into the real estate industry. One of them is the creation of the Real Estate Investment Trusts (REITs).

Under this model, the organizing body splits a single real estate property (say a home) into multiple parts. Investors can then buy as many shares as they want in these real estate investments.

This approach makes it easier for people to own real estate cheaply and easily. It also set the stage for real estate tokenization (division into small units).

Ledger Nano S Plus

How Do NFTs Work in Physical Real Estate?

Real estate NFTs are like any other NFT. You purchase them on cryptocurrency exchanges like Binance and Morpherand store them in a digital wallet like the ultra-secure Ledger hardware wallet.

Their only difference from other NFTs is their link to physical assets. You can link NFTs to physical real estate in two ways:

  • Entire asset tokenization, and
  • Fractional ownership tokenization.

Entire Asset Tokenization

Many developed countries require you to document real estate ownership through a deed’s office. So, the only way to tokenize a property is to turn the actual property deed into an NFT.

Essentially, you are “wrapping” the real estate into a legal entity. Then you create an NFT token representing that legal status entirely in the digital world.

Fractional Ownership Tokenization

With the fractional ownership tokenization model, the issuing party divides the real estate into shares, more like REITs.

Depending on the terms, multiple owners might hold one or more shares of the underlying asset. NFTs or regular tokens can represent the shares in the digital world.

Many platforms allow people to pool funds to buy and own assets jointly—websites like JuiceBox enable people to find others with similar goals.

Two examples of such groups are the AssangeDAO and ConstitutionDAO, which pooled funds to buy famous artworks.

 

What Is the First Home Sold as an NFT?

Leslie Alessandra is the first person to sell her home as an NFT in February 2022. She sold her Florida home for $650,000 through an auction that a prop-tech company called Propy facilitated. Over 7,000 bidders participated in the auction.

The real estate NFT used here was the “Entire Asset” tokenization. The NFT buyer assumes ownership of the legal entity that owns the physical real estate.

In addition, the parties involved still have to do the necessary physical documentation to complete the transfer of ownership from Leslie Alessandra to the buyer of the real estate NFT.

Benefits of NFTs In Real Estate

Real estate is one of the best asset classes to invest in due to its scarcity feature. Creating more land is laborious and expensive, so its value will keep increasing.

However, the starting capital is far above what many retail investors can afford. NFT real estate builds on the foundation of REITs. It creates a secure, cheap, and easy way for small-scale investors to get a stake in this multi-trillion industry.

Here are some of the benefits NFTs bring to the real estate industry.

  • Liquidity: Real estate tokenization can increase liquidity by removing the need for intermediaries and high transaction costs. It can also promote the influx of funds into the real estate market.
  • Transparency: Using blockchain technology to tokenize the real estate industry adds transparency and easy data access to the industry. It also makes future trend prediction easy due to the publicly stored data on the blockchain.

Best Platforms for Investing in Real Estate NFTs

Many real estate projects in the world offer real estate NFTs. Three great options are:

  • Propy (PRO)

Propy is a real estate platform that allows users to tokenize their real estate properties. You can participate in this platform by buying or selling tokenized land or investing in its native token, PRO.

You can also join the Crypto Real Estate Agent certification offered by the platform. You can also buy the PRO token on exchanges such as Binance and Coinmetro.

  • LABS (LABS)

The LABS group allows someone to invest in real estate with as little as 100 USDT. All you need to do is convert your fiat currency to LABS tokens. With the LABS tokens, you can own a share of a small island in Indonesia.

You receive an NFT for every real estate investment with the LABS group. You can also buy the LABS token on the same exchanges mentioned above.

  • Decentraland (MANA)

Decentraland is an excellent option for those who want to invest in virtual real estate. You can buy and sell land, estates, wearables, and virtually anything else anyone can recreate in the virtual world. MANA tokens are also available through most exchanges like Binance and Coinmetro.

Conclusion

Real estate is one of the industries benefiting from NFTs. We expect to see NFTs directly linked to physical assets.

This article covers the use case of NFTs in real estate. NFTs in the virtual world are already popular. It is only a matter of time before the physical real estate industry catches up.

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