United States: Blockchain technology is changing the real estate industry
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On February 10, 2022, the first NFT-based property was purchased through auction on property, a blockchain-focused real estate company. The Florida home was sold for $653,163 worth of Ether, and ownership rights to the home were minted as an NFT on the blockchain as a digital representation of ownership over physical real estate. (See our previous blogs on NFT here and here). This is significant for many reasons and has the potential to significantly alter the way the real estate industry has historically functioned. As mentioned below, while other real estate transactions have already occurred using blockchain technology, this is the first US transaction in which real estate asset ownership was minted as NFTs and then sold on the blockchain.
What is the blockchain? At its core, a blockchain is a distributed ledger for recording transaction data. A ledger is simply a list of transactions. Traditional paper ledgers include consecutive pages where each line records a transaction and when the page is full the process is repeated on the next page. With many blockchains, each “block” is like a page. Transactions are verified and written to a block, and when the block is full, a new block is created. Unlike traditional ledgers, when a block is completed, the system creates a hash value, which is just a random number generated by an algorithm based on the content of the block. This hash value is then written as an input to the new block, “chaining” the blocks together, hence the term “blockchain”. If someone tries to change an entry in a previous block, the hash value will no longer match what was written in the new block and that attempt will be considered invalid. In part, this is how the blockchain creates a secure and unalterable record. As discussed below, the application of using the blockchain for a real estate transaction is a logical progression.
A Non-Fungible Token (“NFT”) is a digitally tokenized representation of property. NFTs are digitally unique and no two NFTs can be the same. Every NFT transaction is recorded on a public blockchain and it is easy for anyone to track and verify the transaction. Illustrations are the most common use of NFT to date. However, NFTs have endless applications, including real estate. The following is a non-exhaustive list of the advantages that Blockchain and NFT offer to real estate transactions.
- Tokenization of real estate ownership, allowing the sale of real estate interests on the secondary market
- Automation of real estate transactions
- Reduce transaction costs
- Smart contracts can automate real estate development terms and lease agreements
- Fractional NFTs can represent partial ownership of physical property
- Transparency of transactions
- Blockchain can enable automatic and undisputed leasing and payment transactions
putting it into practice: Real estate transactions are well suited to blockchain technology and smart contracts. Functionally, the way this transaction worked was that the seller transferred ownership of the property to an LLC formed by Propy, and then ownership of that LLC was minted on the blockchain as an NFT. The NFT was then put up for auction to bidders who were pre-approved and vetted by Propy. Before the auction, the seller was the owner of the NFT that owned the LLC that owned the property. Once the auction was complete, ownership of the LLC was automatically transferred on the blockchain to the winner against the NFT, and the seller received a payment in cryptocurrency (here, Ether) in their wallet. Propy completed typical real estate due diligence, such as title insurance and inspections, prior to the transaction.
This first transaction is just the tip of the iceberg. As this transaction demonstrates, blockchain technology has the potential to automate the closing process for a faster, easier and more secure transaction experience. Real estate agents, buyers, and investors alike need to be aware of blockchain technology, the ways it is changing the real estate landscape, and potential future applications. If you have any questions about the applicability of blockchain technology to your real estate transaction, please contact one of our attorneys.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought according to your specific circumstances.
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