Buying or Selling an NFT Home? Not So Fast. | Ingram Yuzek Gainen Carroll & Bertolotti, LLP
The use of NFTs has gone far beyond just digital art and collectibles. You can receive an NFT when you attend certain events (POAP); you can receive an NFT with the purchase of a blouse (Alice + Olivia);and now, you can receive an NFT with the purchase of a condominium!
According to recent news, Lofty Brickell Residences Miami (“Lofty”), in collaboration with Indiewalls, a New York-based art consultancy, is launching an NFT art collection designed specifically for Lofty condo owners. Lofty is a 44-story condo tower with units ranging in price from about $560,000 to $1.7 million. Purchasers of Lofty condos will be gifted an original NFT for which ownership will be transferred to the buyer’s digital wallet at closing. They will then be able to display the art within their units, as well as throughout common areas, among a rotating display by various artists.
Through this program, Lofty is leveraging NFTs as a marketing tool, to incentivize buyers through a unique approach to connecting art with living; and connecting digital transactions to physical property. While this program is considered the first of its kind, the application of NFTs to the real estate market is not new. In recent months we have seen a variety of creative ways that NFTs are being used, including to purchase real estate. Not just in terms of virtual real estate, but in the sale and transfer of real property.
Transferring Real Property Through the Use of NFTs
That’s right, real property is being purchased and sold through the use of NFTs. As an example, let’s take a look at this not-so-ordinary real estate transaction for a house near Tampa, Florida. Unlike traditional real estate transactions, ownership rights in this case were auctioned off and transferred through the sale of a limited liability company (LLC). First, the seller transferred ownership of the home to an LLC. Ownership was then transferred to the auction winner automatically through the execution of a smart contract. Well, that was easy!
While the purchase of real estate through NFTs is trendy and exciting, it’s important not to be misled by the emphasis many are placing on the ease and instantaneous nature of these transactions. This type of transaction differs from a typical real estate transaction, in that, it isn’t a real estate transaction at all. It is the sale of a company, in this case an LLC, making it a corporate transaction.
A closer look will show that the usual due diligence processes that come with buying a home, such as physical inspections, a title and survey review, an environmental study, a review of the property’s income-producing qualities, and a feasibility study, were still conducted and were, in fact, completed before the auction.
Additionally, there should be due diligence conducted related to the LLC, such as business inventories, assets, debt, financials, contracts, intellectual property, and any outstanding legal matters. Without proper due diligence, you are risking purchasing a property with multiple mortgages or outdated taxes or liens, among a potentially endless list of issues, including potentially costly liability connected the company.
Though Propy, the creators of the real estate blockchain on which the aforementioned transaction was minted, purports that due diligence is conducted prior to listing the house, under a rule called caveat emptor, New York Courts have refused to compensate buyers for home defects found after purchase. It is always recommended to consult with an experienced real estate attorney before engaging in the purchase of any real estate.
It’s foreseeable that this method of real estate transfers may only become more popular. Last month, Utah Business reported that a $4 million home in Millcreek, Utah would be available for buyers to purchase as an NFT. The NFT includes both physical and virtual art, including the actual real estate and the plans. Currently, a local developer, Dave Wilkes, is constructing the Millcreek home, and explained that an LLC holds title to the property. According to Wilkes, there are already a number of potential buyers even though the home won’t be completed for several months. Wilkes anticipates turning the rights to the LLC into an NFT so the buyer of the NFT will own the rights to the Millcreek home, just as we saw in the Florida home example. Utah Business did not report on which platform buyers can expect to purchase the home, but nevertheless, “Buyer Beware” and consult with an experienced real estate attorney and corporate attorney to conduct due diligence on both the property and the company, prior placing your bid.