A New Frontier

When people think of the possibilities available to real estate with the introduction of tokenization, their mind starts to run wild.

“What if tokens could be created to represent real estate ownership?”

Since every piece of real estate is unique, NFTs could be a great way to represent them. If a token represents a property, you have digital proof of ownership in your wallet. That can be plugged into another smart contract to help with the following:

• Mortgage / Refinance — it can take months to secure a typical mortgage, requiring all sorts of documentation and + a good credit score. If you have a token to represent a property, that can be used as collateral to get a loan. In DeFi, you can get a loan in seconds if you have the collateral to back it.
• Invest anywhere in the world — people can pool capital together to invest in specific properties, not limited by geographies, and invest with small amounts of capital.
• Price and title history of a property — once a home’s info is on the blockchain, any transfers in title or ownership are publicly available, getting rid of the need for title insurance over time and providing price transparency on previous sales of the home
• Trade properties entirely online — instead of working with traditional brokers and paying 6% in commissions for each sale, imagine being able to sell your property NFT on a marketplace and have the transfer of ownership happen entirely online.

Tokenizing real estate is complex — not only is there technical complexity to setting up the contracts — but you need to register the token as a security with high costs. When considering the possibilities, people often ignore that many of these features haven’t been built out yet due to the current restrictive policies established by the SEC and the local governments where the property resides. To help adopt tokenized real estate, we want to lay out some of the legal and regulatory frameworks that you will need to navigate if you're going to tokenize real estate.

When tokenizing a property, ask yourself what to do with it. If you plan to sell it in the open market or to a subset of investors, the use case likely passes the Howey Test. If it does, you need to register the property as a security. Under the Howey Test, a transaction is an investment contract if:

1. It is an investment of money.
2. There is an expectation of profits from the investment.