BY ANNE MACHALINSKI – Mansion Global
In recent weeks, stories about bitcoin have become more dominant as the digital currency’s value has skyrocketed, almost tripling in the last three months from $2,000 per digital coin in mid-July to just over $5,600 per coin today.
The story is even more dramatic if you consider that bitcoin—a cryptocurrency backed by an online ledger called the blockchain—was worth about one cent when it was released to the public in 2009, and less than a dollar when it went slightly more mainstream in 2011. That means that early investors who converted a small sum of government-backed currency into bitcoins in its first two years are now millionaires.
Investors who’ve watched the value of their bitcoin holdings grow are now looking to divest those funds into real estate and other tangible assets, said Mike Komaransky, an early bitcoin investor and former head of trading at Chicago-based Cumberland Mining, a company that helps people buy and sell cryptocurrencies for cash.
This explains, in part, why there are more luxury properties being purchased with bitcoins and offered to buyers who want to transact in this way in cities including Los Angeles, Londonand Miami. Developers are also getting in on the action, and notably accepting bitcoins for new projects in New York and Dubai.
“Initially, we expect to see a small number of sales in bitcoins,” said Magnum Real Estate Group president Ben Shaoul, who recently announced he’ll accept this cryptocurrency for deposits and purchases in his new East Village conversion project called Liberty Toye. “But over the next five or 10 years, I could see up to 25% of payments happening in bitcoin or a like digital currency.”
“It’s going to be the future,” he continued, “and a lot of developers will start to adapt and offer the same option.”
The benefits of using cryptocurrencies
Experts agree that we’re at the beginning of a major shift in residential real estate as more and more people are looking to engage in property transactions using cryptocurrencies, which offer quicker, cheaper and more efficient transactions, among other benefits.
“While traditional real estate is very paper based and involves a lot of third-party players, including brokers, escrow agents and banks, the blockchain allows people to transfer funds, property titles and data in a more peer-to-peer manner that is digital and open source,” said Ragnar Lifthrasir, the Southern California-based founder of the International Blockchain Real Estate Association (IBREA) and Velox.RE, a blockchain real estate startup focused on collecting real estate data and streamlining the title transfer process.
The cost savings come not only from cutting out these third parties, who need to be paid and can slow down the process, but also from reducing transaction fees to the 1% required for bitcoin transfers.
Peer-to-peer digital transactions are especially compelling in markets where international sales are common because they’re instantaneous and remove the need for currency conversions and transfers between foreign banks, which can take weeks or in some cases months.
“Cryptocurrencies enable the quick, frictionless transfer of value across the globe,” said EminGun Sirer, an associate professor of computer science and co-director of the Initiative for Cryptocurrencies and Smart Contracts at Cornell University. “This enables someone in Russia to be able to easily send bitcoins to purchase land in Belize.”
Since he announced that he’ll accept bitcoin for purchases in his East Village project a few days ago, Mr. Shaoul said he’s received dozens of emails and calls expressing interest from overseas buyers in China and other Asian countries.
Meanwhile Mr. Komaransky, who is selling his 9,400-square foot, seven-bedroom Miami property for $6.5 million—or the equivalent amount in bitcoins, Zcash or another digital currency—said that early interest in a bitcoin buy has come from South Americans.
“They live in higher interest rate environments and don’t like to hold onto their nation’s currency,” Mr. Komaransky said. “But if they have some of their portfolio in bitcoins, they’re looking for new ways to spend it.”
But we’re not quite there yet
Many industry insiders are excited about the potential for cryptocurrencies and the blockchain to disrupt the status quo when it comes to buying and selling real estate. But although bitcoin and other digital currency transactions may represent the future, we’re not there yet, experts say.
Today, most bitcoin transactions only involve one party who wants to use a cryptocurrency, while the other prefers a more traditional route.
“There are temporary patches to merge markets,” said Dr. Sirer, noting that the service BitPay, which converts bitcoins to cash, is one of them.
That’s exactly what Keller Williams agent Piper Moretti used when she helped a client purchase a $3.2 Manhattan Beach, California property with bitcoin in January. Even though the seller’s agent wasn’t sure about how bitcoin worked, the seller agreed to open a BitPay account and then send an invoice to the buyer for the purchase price. The buyer then transferred those funds, which were immediately converted back to U.S. dollars, and paid the 1% fee. “In the end, it was basically like an all-cash deal,” Ms. Moretti said. But not necessarily an easy or straightforward one. “We were in a 30-day escrow,” she said, “and it took us every one of those days to figure this out.”
Since then, Ms. Moretti has helped the same buyer close on three more area properties using bitcoins. In these other cases, she opted not to use BitPay, and instead went through a London bank that exchanges cryptocurrencies for Euros or U.S. dollars,
but the other details were pretty much the same. The title transfers were all done on paper in the traditional way, and all of the transactions came with some headaches.
“Trying to get people used to an old-school and outdated system on board with this new way of doing things is difficult,” Ms. Moretti said, “but I feel like the people who don’t learn about this now and stay open to these changes will be left behind.”
The need to keep real estate data safe
While accepting cryptocurrencies in real estate transactions is certainly new, this change doesn’t have the capacity to disrupt the entire industry the way that the blockchain could if governments started storing their data there.
Dr. Sirer explained it this way: Most governments keep track of their land records in paper form behind closed doors in closed systems. “This creates the grounds for government malfeasance,” he said, in which people can forge documents and fraudulently claim that some land was a great great grandfather’s that they’re now entitled to. “This is perhaps not a big problem in the U.S.,” he said, “but it’s a huge problem in tropical fantastic places that lack checks and balances, and don’t have a stringent a history of record keeping.”
If land records were moved on an immutable online ledger—which is exactly what the blockchain is—no one could go back in time and manufacture records that didn’t exist, Dr. Sirer said, noting that the Republic of Georgia plans to move its land records to this sort of system, as does Dubai. “I see this as an incredibly empowering adjustment,” he said. “If the bulk of land records aren’t being stored on the blockchain in 10 years, there’s something wrong. I’m confident that that’s where we’re headed in the long-term.
Mr. Lifthrasir agreed that a huge benefit of the blockchain in real estate is preventing fraud, which is mostly based on someone’s ability to produce counterfeit paper documents that look real. “Blockchain is unforgeable,” he said.
And the possibilities don’t end there.
“You can put any information that you want in the blockchain,” Dr. Sirer said. That includes any data about the building, sales history or records from inspections. “Once this data is in this ledger,” he continued, “there’s no way to falsify, alter or delete it. It will all be publicly visible and can never be changed.”
Many questions and concerns remain
While this all sounds great, there’s a lot that still needs to be done for this to work seamlessly, and the first challenge comes down to the quality of data, said Oliver Tickner, the CEO of Streetwire, a startup that’s working to authenticate this data for the real estate industry.
Mr. Tickner said he started the company three years ago when he went through the slow and tortuous process of purchasing a Manhattan co-op. For him, the pain points came down to disclosing all his personal information to the broker, which was then photocopied 10 times and given to a building manager, and photocopied some more and given to the board. He knew that the blockchain could speed things up and better protect buyers’ anonymity because it would allow interested parties to ask questions of the data without revealing who the person was behind it.
When he looked at the larger real estate industry, he realized there were similar log jams with the manual collection and dissemination of data necessary when people want to refinance, buy, sell or rent a property. If quality, verified data about properties and potential buyers was stored on the blockchain, it could then be drawn into what’s called smart contracts, meaning legal contracts written in computer code that rely on programmed rules to direct money flows.
So, Mr. Tickner said, that’s what he’s trying to do. “Streetwire is positioned to be a warehouse of authenticated data for the real estate industry to implement and execute smart contracts in day-to-day transactions.” No more sit downs between brokers and escrow agents and lawyers to review paper documents. It would all be in the code and run smoothly—as long as the data regarding people and properties in the blockchain is accurate. “Quality data is the magic wand that is going to allow smart contracts to add value in real estate,” he said.
The other problem with cryptocurrencies in luxury real estate is also part of their appeal. Because they are digital—and in some cases only require an email address to acquire them—the owner can remain anonymous.
“Sellers can receive bitcoins as a payment,” Mr. Tickner said, “but there may be concerns about where the money is coming from and if it’s legal.”
“The world is trying to figure out a way to deal with this problem,” he added.
Then there are questions about how to deal with payments in bitcoin that are converted to cash, versus those that stay in the native cryptocurrency; how to tax or regulate those purchases; and who has access to search and query data in the blockchain.
“What’s exciting and interesting about blockchain is that we’re just at the very beginning,” Mr. Tickner said. “It has the potential to make a lot of change in a lot of sectors—including in real estate—but no one knows how far it will go yet.”
What he does know is that cryptocurrencies and the blockchain are here to stay. “There’s a lot of live debate in the industry right now and this huge opportunity for the incumbent markets to influence the direction that blockchain goes,” he said. But that will require stakeholders including brokers, real estate attorneys and escrow agents to get involved. “We all need to engage in the problem and help find solutions.”
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