How Cryptocurrency is affecting Real Estate
Changes are flooding the gates of 2021. It's in the air: crypto currency being used as payment in real estate transactions. Back in 2018 Ryan Serhant told Rachel Wolfson in a Forbes article that "with blockchain tokenization, we can remove the unruly pressure of traditional bank financing, which is much healthier for the project and all of the stakeholders. Tokenization is paving the way for a new forefront in real estate development.” Personally, 2018 feels like ages ago. The real estate industry was supremely dynamic in 2020 alone. So, where does that place the use of crypto currency within the industry today?
The theme of the agent conversations I've had have shared a similar spirit. Essentially, 'I know it's been done, but I haven't done one yet. It's only a matter of time'. What does that look like exactly? What impact would it have on transaction timelines? What parties need to be involved? And, how do we protect our clients and ourselves through the transactions?
I was able to grab the thoughts of the Director of Machine Learning at Tavant, Harsha Naidu to help sparse it out.
Tara: How would one technically buy a home in bitcoin?
Harsha: 3 ways
- If there is no loan involved and the seller is accepting Bitcoin as a payment, it is as simple as transferring Bitcoin from the buyers bitcoin wallet to the sellers bitcoin wallet. But you need to have a contract with the seller that is not traditional: in the sense that escrow companies are not familiar or geared yet for bitcoin based real estate purchases, hence such transactions need to happen only with people you are familiar with. once bitcoin leaves your wallet, the only proof you have is that it reached a particular bitcoin address, which is not necessarily easy to link to the seller unless they clearly specify that it is their address, in the contract. Moreover this works best in cases where the seller has no loan on their property, if not: the bank that has the loan will not accept bitcoin as a pay off of the lien, they will only accept fiat. Which means the seller might have to sell the bitcoins and incur capital gains tax and then pay the bank with the post tax money.Also: Bitcoin is known to fluctuate wildly, so the onus is on the seller to accept a contract at the price of BTC on the day that it is executed on. There is a chance that Bitcoin might fall by say 10% overnight, unless the seller is willing to hold BTC acquired via the sale for a while, they might not realize profits.
- Taking a mortgage loan from a lender: In this case, the buyer will have to dispose the BTC they have, season the money [current rules are to season for around 2 months] and then use the money for the down payment in fiat, and get a loan from a bank. Here too, the underwriting rules wary from lender to lender. Some lenders might not be kind to money acquired via BTC and be stringent on the buyer with rules.
- This is not yet happening, but I expect it to happen soon. Blockchain: it is a decentralized way to record transactions on cryptocurrencies, it is maintained not by any central authority but by a mass collaboration of participants who can validate transactions, transactions are immutable, once on the blockchain, they stay there for ever and cannot be changed. Smart contracts: The blockchain is in most cases as public ledger with all the transactions, imagine that all transactions about a house or by a person are already on the blockchain, you could then trigger the eligibility/ underwriting/ sale of a house by looking at various other transactions which would equate to verification of income, title, whether a loan is funded. Eventually the contract of sale can be a transaction that can be hosted on this ledger and you could even track loan payments for servicing on it too. A few companies have started proof of concepts on Ethereum based blockchains for smart contracts for mortgage lending, but this is an emerging field in my opinion, and once it gains traction, the closing times, costs, underwriting times and costs could well be reduced by a great %.There are a lot of considerations here: this being a evolving technology: security is an issue, misrepresentation is possible and the laws around such contracts are still nascent, at best. Moreover these mortgage loan contracts once available, if they need to be sold in the secondary market as tranches, the SEC needs to approve it and there will be jurisdictions that would need to be mulled."
Tara: Do you think this is something that we will start to see more of soon?
Harsha: I absolutely think so. Believers in cryptocurrency are already executing P2P contracts for case #1 above, as they trust the value of cryptocurrencies and understand the benefits and risks of it.
As belief in cryptocurrencies increases, the transactions for mortgage lending vis cryptocurrencies in some manner or the other would increase, thus making it more mainstream, and eventually leading to #2 above at higher volume and eventually #3, in my opinion.
Tara: Why and how soon?
Harsha: This is purely my opinion, but millennials are the highest % of retail bitcoin buyers, according to Forbes :
- 42% of those in the 18-34 age group say they are likely to buy bitcoin within the next 5 years, while only 8% of those 65 and older claim they will make such an investment.
- 20% of millennials claim they own some bitcoin. Only 2% of those 65 and older claim to have any bitcoin.
They will want to transact with bitcoin soon enough for large real world purchases, so, within the next 5 years, I would expect house buying either directly with BTC, or with funds acquired by sales of BTC to increase significantly.
Tara: What implications could this have to other aspects of the real estate and finance industry?
Harsha: cryptocurrency tokens: they represent an asset and are on a blockchain that the issuer maintains. crypto tokens are offered via a sale of tokens to the general populace, its called an ICO [initial coin offering]. Imagine that the asset is a house or set of houses or hotels, the issuer who owns these houses or any such real estate properties or intends to buy and own these properties could fund themselves via an ICO [crowdfunding] and then issue tokens to each of the buyers, effectively giving them part ownership of the properties or the proceeds from rent or sale of these properties. These tokens could be traded on cryptocurrency exchanges just like stocks and buyers could trade ‘a part of a house’ instead of having to do transactions on a full house, this would give buyers a sense of ownership of property, at the same time it would let them invest only as much as they intend to/ afford .
And as mentioned before: smart contracts on the blockchain could reduce turn time of mortgages and completely change the way we maintain contracts and deeds, a high level of automation and efficiency could be achieved.
The SEC and the other government agencies will sooner or later have to take a call on making laws for all of this, it is out there, it ties up to fiat eventually and it is not going away. The part where crypto and fiat intersect brings the agencies that monitor fiat into picture and they eventually need to wrap their head around it.
Tara: How will that change bidding wars in hot markets do you think?
Harsha: Cryptocurrencies are highly volatile, but have also been known to have high returns [BTC was 1000 dollars in 2013, it is around 37000 dollars today [1/15/2021], but it has swung wildly from 1000 to 12000 to 5000 to 40000 to 30000 to current value]. So: if the buyer knows the value of cryptocurrencies and is bought into them well and understands the benefits and risks of it, they might prefer crypto over cash, given the speed and ease of the transfer and believing that its an asset that will further appreciate, they would not need to reinvest the cash acquired by sale as it already is invested in the instrument to believe in. Hence a bid of 20 bitcoins today  might attract sellers more than a bid of say 775000, because at this point of time bitcoin is in a bit of a bull market and is expected to only increase value, the buyer is actually parting with further appreciation of their crypto asset by handing it over for a real estate asset. As markets and trends vary, the value of cryptocurrency that is pegged in the mind of the buyer will determine their preference in a bidding war.
Tara: Do you think there are particular markets that may be more inclined to the adoption of cryptocurrency in general?
Harsha: Geographically, for mortgage lending:
- 2019: https://www.businessinsider.com/cities-millennials-moving-good-jobs-salaries-2019-2
SFO, Denver, Austin, Portland, Nashville: these are the places where most millennials are living, even with migration due to COVID and work from home, the list of the top 10 would probably remain the same with some cities exchanging places [Austin and Nashville might have one up the list and SFO and Portland might have gone lower in the list].
- Average house price: Average house price in Austin or Denver is lesser than a house in SFO or Manhattan.
Given these two data points, millennials who are the strongest advocates of cryptocurrencies and probably want to buy houses preferably without a loan and entirely in crypto or crypto + already existing fiat funds would probably transact in these places: Austin, Denver, Nashville, Milwaukee, Portland and such.
Corporations that want to have a real estate portfolio which they could ICO on would also probably want to be buying in low cost areas preferred by millennials first, followed by high cost areas with high millennial residence %, as these would be the places that their target market would want to have their ‘piece of the house’ in.
Ultimately, time will be the final determiner. Have a related experience or bold opinion on the topic?! I'd love to hear it. Email me at Tara@yaza.io