Crypto and Real Estate

The Coming Crypto Wave

There is something new on the real estate investing horizon. Prepare to be peppered with hyperbole, misdirected with "smoke and mirrors", and very probably ripped off as countless businesses pop up with opportunities to use crypto to make investing in real estate easy.
Two phrases to watch for are:

1. Tokenized Real Estate
2. Fractional Ownership

These two terms may be used separately, or together. Regardless, the odds of it being a scam are nearly 100%. I will explain each in this article. But, first you may need some basic ideas of crypto.
Cryptocurrency BasicsCrypto or cryptocurrencies come in many different forms. The most basic differentiator is if the crypto is a non-fungible token (NFT) or a fungible token. All of them live on something called a blockchain.

BlockchainA blockchain is a computerized data structure that is, typically, distributed and replicated across many computers. Each entry is validated before being added and any changes must be validated by a consensus of "miner" before it can be changed, or added to the blockchain. Because of this required consensus and replicated across many computers, blockchain records are considered immutable. 

NFT

Without getting deep into this, NFT are unique crypto items. Each is different and cannot be readily exchanged for another NFT. In terms of real estate, think of it like deeds to property. Although all deeds have many things in common, you can swap one deed straight across for another deed.

Fungible Crypto

Fungible tokens are, more or less, like currency. Within each currency they can be divided and exchanged easily. For instance, you can take a $100 bill to the bank and swap it for five $20 without paying an exchange fee. 
However, when you try to swap one fungible currency for another, you may have to deal with exchange fees and exchange rates that value each currency independently and then reconcile them. That is what happens when you trade your dollars for Euros.
Examples of fungible tokens include Bitcoin (BTC), Ethereum (ETH), and countless meme-coins such as DogeCoin.

Tokens

Regardless of where the crypto is NFT or fungible, a single unit of either is typically referred to as a "token." A token is just one thing that represents something else. In the real world, a deed is token that represents the ownership rights to a piece of property.

Tokenization

Tokenization is the process of creating a crypto token, typically an NFT, to represent a real world asset. 

Tokenized Real Estate

Tokenization of real estate refers to creating an NFT to represent the ownership rights to a piece of real estate. 

There are tremendous potential benefits from converting real estate ownership records into immutable records, distributed and replicated across many computers, with changes validated through a consensus of disinterested third-parties. It is this exciting potential which is fueling much of the current excitement about the intersection of crypto and real estate. 

Unfortunately, there are some serious obstacles to be overcome before the potential benefits of this intersection can be realized.

Not Legal

Okay, that isn't entirely true, this isn't illegal. But I hope it got your attention. 
While it isn't illegal to tokenize real estate, there is currently no state in the US that recognizes an NFT as a legally defensible claim to real estate. If you buy tokenized real estate, and the deal goes bad, if your only proof of ownership is an NFT, the judge will probably dismiss your case without hesitation.

Until that hurdle is overcome buying tokenized real estate is the functional equivalent of buying a deed to the Brooklyn Bridge from a con artist.
To quote PT Barnum, "A fool and his money are soon parted."

Fractional Ownership

If you own 100% of nothing, you own nothing. 

Fractionalized real estate is the notion of selling parts of the ownership of something to several people. Within the real estate world fractional ownerships are pretty common. Joint tenants in common (JTIC or TICs), partnerships, multimember LLCs, syndicated loans, even real estate investment trusts (REITs) can be considered a form of fractionalized ownership. 

What all of those fractionalized ownership methods have in common is that they are recognized by the courts. There is legislation and a canon of law that relates to each of them. Tokenized fractional ownership doesn't have any of those benefits.

Case Study

What follows is a true story. However, due to an NDA, I cannot reveal any of the names. 

Some knowledgeable associates of mine were asked by a major crypto company to investigate an exciting new startup in tokenized real estate. For convenience, we will call the startup RealEstateTokens or RET (not the actual name of the company). 

The Offer

RET had a nice website showing dozens of residential properties. Some were listed as "Sold" while others were still available. Each residence showed the address, had pictures of the property, stated property values, and indicated how much rent was coming in off the property each month. The site had nice testimonials from satisfied customers noting how they got checks for their share of the rent within 24 hours of closing the deal.

Each property was being sold through an NFT. The buyers could buy all, or part of the property. The current owners would provide the buyer with an NFT showing their percentage of ownership and would immediately start sending checks.

Reality

My associates drove around to look at the offered properties. They found that sometimes the picture matched and other times, it was of a property at a different address that looked similar. In the most egregious circumstance, a unit that was supposedly rented for several thousand dollars per month had no roof and a tree growing up through the living room.

Searching public records failed to demonstrate the RET had ever owned any of the properties. There was no clear connection between RET and any of the many residences they were selling through their site.

If RET was actually paying out to its buyers, it was likely a Ponzi where they used money from one buyer to pay another. After all, if someone gives you $100,000 for a property you don't own, how many $1,000 checks can you send back to that foolish buyer to get a great testimonial and pull another buyer before you cut and run?

FraudEvery experienced real estate investor knows that fraud is rampant in the real estate investing world. Knowledgeable investors always follow through on rigorous due diligence to make sure that:
1) The person offering the deal actually has the right to sell the property.2) The property is where the seller says3) The property is substantially in the condition the seller says
If you don't know these three foundational pieces, you should never close a real estate deal.
It is probable that RET was taking a page out of the fictional "Producers" handbook (based on the hit play and movie) and were selling the same properties they didn't even own multiple times. If they weren't there was certainly nothing to prevent them.

Gone With the WindOne last thing to remember with a crypto deal. This isn't like a credit card purchase, or even writing a check. When you close a crypto deal the funds are instantly transferred and you can't cancel the transaction once its done.
Neither banks, law enforcement, nor regulatory agencies can get your money back for you once you have transferred it from one crypto wallet to another. 
And, the owners of the wallet you sent your money to, aren't easily found out.

ConclusionsThe crypto wave is coming to real estate investing. When the legal standing of NFTs for real estate are sorted out, the opportunities will be amazing. However, then as now, you must protect yourself from fraud. No one else will do it for you.
Until the legalities get sorted, I strongly suggest you stay away from Tokenized Real Estate and Fractionalized Tokenized Real Estate. 
If you can't resist the allure, just send me your money instead. At least you will get the truth instead of totally wasting your money.
Tom SheppardThe Savvy RE InvestortheSavvyREInvestor.com

Originally called "The Home Finders", this blog was created by ADB Properties and The Gold Seal Homes Group to provide a resource for people to find peace of mind through quality, affordable homes.(www.GoldSealHomesGroup.com). All affiliates of The Gold Seal Homes Group agree to abide by high ethical standards and certain operating procedures that make it easy for people to do business with all affiliates.

Unless otherwise noted, all blog entries are written by Thomas Sheppard.
(c) Copyright 2017 A+ Results, LLC.