Buying or Selling an NFT Home? Not So Fast. | Ingram Yuzek Gainen Carroll & Bertolotti, LLP

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.