As Bitcoin and blockchain technology become more prevalent, the real estate industry is speculating about whether it will be adopted as a mainstream form of payment to purchase homes.
Despite its presence in the world of finance, Bitcoin and blockchain technology are still shrouded in mystery. Could you explain it to your agents? How about to a client?
Here’s a little history:
Back in October 2013, Phillipp Preuss, a home owner in Long Island, N.Y., made headlines when he advertised that he would accept Bitcoin offers for his $800,000 Southhampton home. He was quoted in the press as saying that the tactic might help his property appeal to international and younger buyers.
An early adopter of Bitcoin currency, Preuss found that few in the real estate industry knew what it was. Simply put, Bitcoin is a form of digital money (called cryptocurrency). The blockchain is a “public ledger of all Bitcoin transactions that have ever been executed,” according to Investopedia. The blockchain is continually growing as transactions and information are added to the ledger.
The currency innovation continues to rock the financial world as it grows in popularity. There are no shiny coins you can put in your hand. There are only digital balances of public and private “keys.” These keys are a string of numbers and letters linked through a mathematical encryption algorithm. This is the secret to Bitcoin’s security and relative anonymity. The public key is like a bank account number and the private key is like an ATM pin.
Individuals and companies have Bitcoin “wallets” to store keys they purchase from online exchanges. There are a limited number of Bitcoin ATMs, where you get a key printout. Like cash, if you lose that piece of paper, you’ve lost your Bitcoin.
To date, there are more than 2.5 million items you can use Bitcoin to buy — including real estate. Bitcoin sites like BitPremier, which sells luxury items, continue to crop up. If a real estate agent, seller, or financial institution is willing to take Bitcoin, there’s really no stopping it. Real estate agents, brokerages, appraisers, title companies, and more are stepping up to the Bitcoin plate, hoping they’ll score more business by accepting this currency.
(By the way, grammar nerds say Bitcoin with a capital “B” is the proper name for the currency and also used to describe the concept. A lowercase “bitcoin” refers to actual currency spent: “That car cost me two hundred bitcoin.”)
Who’s Behind The Curtain?
The head-scratching part about Bitcoin is who’s in charge of regulating it and what it’s actually worth.
Bitcoin has no central command. It was allegedly based on a white paper by Satoshi Nakamoto, which is probably a pseudonym for a group of people. Historians say developers first went to work on it on SourceForge, a community collaboration website, and the first transaction took place between “Satoshi” and friend Hal Finney on Jan. 12, 2009.
There are many companies that make it useable to consumers. Bitcoin’s peer-to-peer monetary exchange uses computers all over the world working together to process transactions. Bitcoin’s site says to “think of it like email. Anyone can use it, but there isn’t a single company that’s in charge of it.” This allows Bitcoin to move freely throughout the world.
Bitcoin’s worth is a bit more puzzling. There is a maximum cap of 21 million bitcoin in the world. Since the supply is fixed, the value goes up and down. Bitcoin developers said in 2011 that one bitcoin was worth less than one U.S. dollar, but in 2015, demand for it drove the value of one bitcoin up to hundreds of dollars. Currently, one bitcoin is worth about $600, according to CoinDesk.
Back in 2013, Preuss’s $800,000 four-bedroom, two-bath, 1,754-square-foot house cost the equivalent of 1,445 bitcoin. Today, at that same dollar amount, you’d need about 1,333 bitcoin to purchase his house.
Acceptance Is One Thing, Reputation Is Another
Bitcoin faces the same obstacles as credit cards did when they were first introduced. People had a hard time wrapping their brains around the idea of credit cards. Individual retailers used to offer in-store credit for its customers. But in 1950, Frank X. McNamara, Ralph Schneider, and Matty Simmons introduced Diners Club International, where one little piece of plastic could extend credit at any restaurant, retailer, or service that would accept it.
And that was the key: getting people to understand and accept it. Bitcoin is more complicated than credit, so getting companies and consumers to understand and accept its use is the challenge. Overstock.com was the first major retailer to accept Bitcoin payments. As those transactions went smoothly, more companies followed. Amazon held off accepting Bitcoin, stating its consumers have not asked for it, but some say it’s planning to create its own cryptocurrency.
Bitcoin’s reputation as a platform for criminal transactions has certainly been a public relations issue. On Feb. 5, 2016, a Los Angeles hospital was hacked, and criminals demanded a $17,000 ransom — paid in Bitcoin.
Whether you’re for or against Bitcoin, it’s being used every day. It’s still not an officially accepted form of currency in the U.S. (though it’s taxed), as well as China, Russia, and India. But you can trade Bitcoin for all kinds of products here and around the world. No doubt, legislation will continue to be introduced to regulate its use, especially because transactions can’t be undone. Sorry, no returns.
Is Bitcoin Risky For Home Sellers?
In January 2014, Visa Abstract became the first title company to accept Bitcoin. Visa Abstract admits Bitcoin might not survive in the long-term, but it’s willing to accept that or other forms of cryptocurrency if the market demands it.
If a title company chooses to accept Bitcoin from a buyer at closing, they accept the risk; it’s really not the clients’ risk. The seller isn’t going to walk out of closing with a strip of paper from a Bitcoin ATM. They’ll get their money in U.S. dollars. If you or one of your agents is representing a seller, and the purchaser wants to use Bitcoin like cash, you can turn it down. Given its wildly fluctuating values, it’s better to have the buyer go through a title company.
The Future Benefits of Blockchain Technology
Is cryptocurrency part of the future of real estate transactions? It’s not so much a question of “if” as it is “how and when,” although the medium (Bitcoin vs another cryptocurrency) has yet to be determined.
As long as forms of cryptocurrency are accepted, homes will undoubtedly be purchased this way. Do home owners have anything to fear? As long as they use a licensed agent, a reputable lender, and title company, these transactions shouldn’t hamper the sale.
While Bitcoin is still viewed as a somewhat speculative currency, blockchain technology is here to stay. As an instantly verifiable and secure public record, information can be quickly and easily accessed. This may be the most exciting part for the real estate industry.
If property titles could be secured in the blockchain, it could transform and speed up the mortgage and title process. It could also lessen fraud by preventing the forgery of documents. The International Blockchain Real Estate Association (IBREA) is certainly working toward that end. Its more than 500 worldwide members met this spring in Newport Beach, Calif., to collaborate on mainstreaming this technology. IBREA’s initiatives are ambitious. It’s seeking to create universal platforms that are “open source, nonprofit, secure, and scalable” for property and title, as well as for digital deeds. Insurance and other essentials of real estate transactions could also be added to the blockchain. The IBREA hopes to promote and set standards for real estate transactions using cryptocurrency and set up industry best practices for the escrow process.
In time, you’ll need to understand Bitcoin and blockchain technology in order to say you’re an expert in real estate. You might not have to deal with this kind of transaction now, but being able to speak intelligently on the subject will certainly help your reputation and prepare you for the future.
Wondering what happened to Philipp Preuss’ Southhampton home? He finally sold it for $740,000. No one knows if the buyer paid in Bitcoin.