How crypto and NFTs could help regular people become real estate tycoons

By using technologies online from the cryptocurrency world, like tokens and blockchains, regular people could participate in real estate transactions that are too unwieldy in the analog world.

For example, a hot new idea is using NFTs, or non-fungible tokens—digital certificates that convey exclusive rights to something. Although NFTs are just starting to be applied to real estate, supporters say they will become standard in the industry.

NFTs have already overtaken the art world. Artist Mike Winkelmann, who works under the alias Beeple, sold a digital collage for $69 million through Christie’s auction house in February. There could be millions of copies, just as there probably are of the Mona Lisa. But Leonardo DaVinci signed only one. The NFT is the digital equivalent.

But trendy art is one thing. Staid real estate, another.

For one thing, the real estate industry is slow to adopt new technology. For another, buyers and sellers may be reluctant to transact property without signing traditional paperwork and jumping through all the hoops they’re used to.

Supporters of NFTs say that they would eliminate much of this bureaucracy. In theory, NFTs would stand in for the usual contracts and other filings and agreements.

“The NFT operates in many respects exactly like a deed would in real estate transactions,” says Josh Morton, an attorney at legal firm Pillsbury Winthrop Shaw Pittman. “What a deed ordinarily does is give evidence of ownership to a piece of property.”

A deed provides three things, according to Morton: proof of ownership, contractual terms about what can be done with it, and a basis for buying and selling. An NFT could wrap them all up in a single package with an online bow, ready for buyers.

California dreaming

Jered Kenna, owner of a cooperative living building in San Francisco, where people have individual rooms and share common kitchens and bathrooms like a college dorm, is among those trying to pioneer NFTs in real estate. He’s auctioning lease rights for individual rooms in his property—including the cost of all utilities and access to common facilities—for 75 years at guaranteed rate of $1 a month. Even if utilities, property taxes, and all the other expenses rise over time, owners of the NFTs will pay Kenna almost nothing.

Winning NFT bidders can live in a room, rent the space to someone, or even sell all those rights—with the same 75-year, dollar-a-month payments to Kenna. If NFT buyers end up selling, they would owe Kenna a 1% of the sale price.

“Some people just don’t get it, and others see it immediately,” Kenna told Fortune about how NFTs eliminate the risk of rising expenses that come with owning a property sold in the conventional way. “Why would I pay a million for an apartment and then have taxes, fees, and upkeep?”

What someone with an NFT buys in this San Francisco building is called an option—the right to exercise future transactions. Options are common in many types of investments, including real estate.

“Options can be very valuable,” says Morton. “It happens all day, every day in real estate. But there does not exist a highly-liquid market in option interests. The size of the market and volume of trading is nothing compared to the purchase or lease real estate generally.”

As with other aspects of real estate, transactions are typically done through brokers. If potential buyers aren’t connected to the right people, they don’t hear about the opportunities. The additional value NFTs can bring, making properties more easily to find online, is “doing something old in a very new way,” Morton says.

Because NFTs can be easily discovered and traded through online marketplaces, they could bring additional buyers and therefore more money into real estate transactions. They would also include electronic versions of all the necessary documents and agreements in a way that makes them easy to authenticate.  

So far, the promise of greater interest and improved efficiency hasn’t materialized for Kenna. The first auction of one of his rooms ended on May 12 with a top bid of 28 Ethereum coins, or nearly $111,000. Kenna, who had said he thought the winning bid would be around $300,000 to $400,000 range, said the amount fell short of his undisclosed reserve price.

Ultimately, if the NFT auction didn’t pan out, he could go back to renting units for $2,000 monthly, the amount he had been charging before the pandemic. The virus had caused many former residents to leave the city, including most of his renters.

Shaun Pappas, an attorney at Starr Associates, a real estate law firm that has helped real estate developers make use of crypto technologies for transactions, raised doubts about NFTs taking off in real estate anytime soon. “In real estate in general, it takes time for owners to get comfortable,” Pappas says. “I think the NFTs and things coming down the pike now will probably take a bit more time.”

Army of small investors

The nascent world of crypto-fueled real estate is much larger than lease options, or even NFT technology. Using a different approach called tokenization—which enables transactions of partial stakes in properties—buyers may not pine for a pied-à-terre in San Francisco, but rather hanker for a piece of a big property.

“All of a sudden, a million people might want to own a $1,000 investment in the Empire State Building,” says John Sarson, CEO of digital asset advisory Sarson Funds.

Beyond bragging rights, shareholders in such a case would get a cut of the revenue the building generates. Sellers, for their part, may be able to raise more money than what big institutions and investment funds—the usual buyers of marquee properties—pay.

Fractionalized ownership or a building is already possible without technology. The legal mechanism, whether on paper or through crypto, is for owners to sell securities, or shares of stock, that are recognized by the Securities and Exchange Commission.

“But the Empire State Building doesn’t want to become a security because the reporting is too onerous,” Sarson says.

But technology would more efficiently handle the complex transactions and information tracking that would otherwise be done slowly on paper. And, in theory, it would increase buyer demand, pushing total property prices higher.

The concept has already moved beyond theory. RedSwan CRE Marketplace claims to be closing the first of its tokenized commercial real estate projects, a 317-unit apartment building in Houston that the company expects to sell for $43 million to $46 million, at the end of May.

RedSwan CEO Ed Nwokedi is hoping to close 17 tokenized deals this year that he thinks will excite small investors. “It gives them options never had before. They can pay $20,000 and be a fractional owner of a high-rise building.”

Instead of dreaming of being a wheeler dealer in a board game, now someone can look at a building like the Empire State and think, “I wonder what my ROI would be on that?”