Cryptocurrency and real estate—hype or opportunity?
You’ve probably heard of Bitcoin and the term cryptocurrency. With all the noise surrounding this new form of currency, you may have clients or even colleagues asking you what impact it will have on real estate. Here, we’ll clear up some of the confusion and help you understand what the future may hold.
What is cryptocurrency?
Let’s start with the basics. Cryptocurrency, according to the Oxford Dictionary, is “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
So what does that mean? In 2009, a developer named Satoshi Nakamoto invented what he referred to as a peer-to-peer electronic cash system, named Bitcoin. Much like other online peer-to-peer systems allow users to share music and videos with each other, Bitcoin allows users to exchange money. But unlike previous attempts to create a digital cash system, Bitcoin doesn’t rely on the honesty of third parties to police the integrity of the transactions. Instead, it uses blockchain, a long block of code in which every single new transaction is added to the chain, or ledger, for all to see. Each Bitcoin user has their own unique private key, a string of characters, that they must enter in order to engage in a transaction. To make sure that nobody is trying to use the same Bitcoins twice, or cheat in some other way, people called miners use their computers to verify the transactions, and are paid for their efforts with more Bitcoin.
Anybody can buy or sell Bitcoin or become a miner. Since the transactions are completed outside of a bank and tracked only by the person’s private key, they’re anonymous and largely untraceable. They’re also extremely secure. As you may imagine, this makes Bitcoin, and other cryptocurrencies like Ethereum, Ripple and Litecoin, very attractive to some folks and very concerning to others.
What do cryptocurrency real estate transactions look like?
Ready or not, cryptocurrency transactions in real estate are coming – in fact, they have already been happening around the country. In December 2017, a penthouse in Miami was listed for 33 Bitcoins, and the seller said he would not accept any other form of payment.
From a settlement standpoint, cryptocurrency is no different than any foreign currency. Most everyone involved in the transaction outside of the buyer and seller will require US dollars for payment of services or debts and liens. There are a couple of different methods that have been used over the past year:
- Conversion to cash prior to closing: if the buyer is using Bitcoin (or another cryptocurrency), but the seller wants cash, the Bitcoin must be converted to dollars using a service like Bitpay or through selling the Bitcoin on the market. Once converted to dollars, it’s a regular closing.
- Seller pays and buyer receives Bitcoin: This is a bit more complicated for a couple of reasons.
- First, dollars are still necessary for payoffs and fees. Each party will need to provide payment in US dollars to ensure all necessary payoffs and fees can be made. (They can always convert Bitcoin to cash if necessary).
- Another tricky aspect is related to escrow laws which require good funds for the transfer of real estate – meaning a wire, cashier’s check, etc – and all in US dollars. In these circumstances, title companies can treat the transaction as a trade, similar to two property owners swapping real estate in lieu of making payments. The buyer and seller would make the Bitcoin payment outside of or during closing, and the title agent will hold the deed in escrow until seller confirms payment has been made.
- Finally, there is the issue of the market value of the real estate being sold, which is used for taxation and title insurance purposes. The value of Bitcoin and other cryptos has fluctuated wildly over the past year. On January 4, 2017, one Bitcoin was worth $1,077; on December 18, 2017, it peaked at $19,498.63! As of June 22, 2018, one Bitcoin was worth $6,750.31.
Let’s say someone agreed to sell her house on December 18 for 20 Bitcoins and was expecting a value of about $390,000, but if she didn’t close until June 22, that value was $135,000. So what was the actual market value, in dollars, of that transaction? In that situation, we would work with the local assessor’s office to establish a market value, which may involve the purchase of an appraisal. If requested to provide title insurance at an amount above the assessor’s appraised value, we would almost certainly require an appraisal.
How will cryptocurrency impact your business?
Most likely, it won’t – at least in the short term. Because of the wild value fluctuations, cryptocurrencies have not been widely adopted by the general public. If your bread-and-butter business is traditional residential homes with first mortgages, US dollars are going to be required by lenders, so any use of Bitcoin would be a conversion to cash only.
If you do represent non-traditional buyers of real estate such as foreign investors or even tech-savvy cash buyers, it is possible that you could see such a request, and we are prepared to support you in that transaction. You will just need to ensure that your clients are aware that US dollars will be required for certain items in the transaction, including settlement fees and commissions, so that they’ll have to fund that aspect of the closing in dollars.
Cryptocurrencies are not likely to go away, and we will certainly see transactions in the greater St. Louis area in this form at some point in the future. We are actively monitoring these changes in technology and culture. So, rest assured, if you have a client wanting to use Bitcoin, True Title will be your partner to guide you in that transaction.