Last week, Roofstock, a digital real estate platform, facilitated the sale of a $175,000 home in South Carolina through a non-fungible token, prompting a debate over whether the technology smooths the property-buying process or complicates it.
Roofstock onChain, which is the Web3 subsidiary of the company, listed the property on its NFT marketplace powered by Origin Protocol (many incorrectly believed it was OpenSea.) It sold using USDC, a stablecoin.
“Instead of waiting months for underwriting, appraisals, title searches and preparing deeds, I was able to buy a fully title-insured, rent-ready property with one click,” the buyer of the property, Adam Slipakoff, had said in a statement.
But as news spread about the event, questions emerged. One tweet that got a lot of attention questioned who really owns the property, and whether the token holder owns just the token or the property as well.
“For the property itself, the title is an LLC, and all we’ve done with the NFT here is that the NFT represents the sole ownership of that LLC,” said Sanjay Raghavan, the head of Web3 initiatives at Roofstock, in an interview with MarketWatch. “People have bought and sold properties through LLCs forever, right? That’s not new. All we did was make it easy to sell that LLC from person A to person B.”
Raghavan added that the operating agreement of the LLC contains language that says the owner of the token is also the owner of the house, so it’s legally established in the LLC operating agreement.
But to others, the explanation only raises questions regarding security.
“What if someone steals the NFT from a blockchain?” asked Sean Scapellato, a real estate attorney in South Carolina. “I don’t know how you handle someone knocking on your door saying they bought your NFT and the house now belongs to them.”
Hacks are less of an issue when the owner of the NFT isn’t anonymous, said Raghavan. In the U.S, a person can’t own an LLC anonymously. This makes it harder to take over ownership of a house by hacking the NFT. The homeowner is known, and this is recorded in documents linked to the token, he said.
That’s in contrast to NFT art, which is often held by anonymous users online. Hacking and transferring ownership is easier when the original owner is unknown.
The NFT is also the only thing stored on the blockchain itself, while metadata associated with it is linked elsewhere, in a data room like a server or a cloud, and that metadata can be updated with all other relevant property information, Raghavan told MarketWatch.
For real-estate agents, the technology is brand new, and may raise more questions than it answers. “How does resale of this property work?” said David Conroy, the National Association of Realtors’ director of emerging technology, in an email to MarketWatch.
“What steps were taken to ensure regulatory compliance, property recording, and tax implications around selling the property in this manner versus a traditional sale?” said Conroy, who added that the NAR is monitoring these technologies as they develop.
Raghavan said that only those with a verified buyer flag on their accounts can get the token transferred to them. This flag, sort of like a blue check mark on Twitter, lets the system know that the buyer’s identity has been verified by the company. “Without that, if you try to transfer this token, or try to buy it on an NFT marketplace, the transaction will fail.”
The team worked with legal and tax experts to make the property compliant with law, said Raghavan. But with laws and regulations varying from place to place in the U.S. and abroad, this transaction might be challenging to replicate in other jurisdictions, he added.
Legal expert Scapellato emphasized that even if a cryptocurrency is accepted for purchase, it doesn’t necessarily specify what rights are conveyed as a deed does, and is unsure if an NFT would have the same utility as deeds do.
“State property laws differ all over the U.S., and we have hundreds of years of jurisprudence based on the conveyance of a deed with specific warranties and rights that align with the laws of that state. An NFT would have to have the same utility or it’s useless when problems must be litigated,” he said.
For the Roofstock team, the South Carolina transaction serves as a case study on what can be done, with the right research, elsewhere in the future. “We’ve run several 50-state analyses [to find out if] an LLC can be transferred from A to B without triggering a tax event, et cetera,” said Raghavan. “Within the U.S., when we go to the next state, we will comply with that state’s law with respect to this, how we do these NFT sales.”
For the Roofstock and Origin Protocol teams, the sale of the home also served as an example of what can be done with NFTs as the underlying technology to transfer physical assets.
Origin Protocol’s Matthew Liu said the technology will define the evolution of the internet. In the future, we won’t refer to NFTs as NFTs, the same way we don’t call them “HTML webpages” anymore, he said in an interview with MarketWatch. But the underlying technology of HTML created the blogging, e-commerce and social networking industries, the same way NFTs will change industries in the future, he said.
“We’re going to see a world five years, 10 years from now, that’s drastically different,” said Liu. “There is going to be a new version of the internet, and NFTs, are going to be like the fundamental building block for digital ownership. But with all major technology cycles, you do see kind of like an overhyped initial cycle, then a crash, and people are building and then like a second cycle where there’s actual real utility and use cases. And it ends up being really, really powerful.”