This April, one of Inman’s most popular recurring theme months returns: Back to Basics. All month, real estate professionals from across the country share what’s working for them, how they’ve evolved their systems and tools, and where they’re investing personally and professionally to drive growth in 2022. It’s always smart to go Back to Basics with Inman.
Before we dive into the potential impacts of cryptocurrency itself on the residential housing market, I must preface this by saying that the very word “crypto” is one that certainly divides people.
Some see it as revolutionary … a tangible asset that will take over one day as the “de-facto” global currency, while others believe it to be unsustainable and ultimately valueless. There are even some who firmly believe that it’s nothing more than a Ponzi scheme.
Now, everyone is certainly entitled to their opinion — and I will refrain from offering my own view on the currencies themselves — but, although still in its infancy, it continues to evolve and is garnering significant interest from individuals and large corporations alike.
Why are corporations interested, you ask?
Well, a recent report from Crypto.com put the number of people around the globe who own some form of crypto at more than 295 million, and they are forecasting this number to explode this year and hit the 1 billion mark!
And the value of all these currencies today?
As of March 14, the combined value of all cryptocurrencies was 1.74 trillion dollars with the largest — Bitcoin — valued at almost 740 billion dollars.
So it should not be a surprise to see many mainstream companies — across multiple industry sectors — start to introduce ways to accept crypto as payment for goods and services.
Companies moving into this space include AMC movie Theaters, which recently announced their plan to accept coins by the end of this year. Fintech companies like Paypal and Square are also betting on crypto by allowing users to buy currency on their platforms. And, unsurprising to most, Tesla is also interested but has yet to confirm whether it will accept coins as payment for its vehicles or not.
With cryptocurrencies now gaining traction in mainstream businesses, the housing sector has started to take an interest, too, with the emergence of companies like Propy — whose goal is to totally automate the home sales process by introducing blockchain-based technology to allow transactions to occur entirely online using smart contracts. Other companies are also figuring out how to use blockchain technology to grow the “fractional-ownership” segment of the housing market.
But when it comes to simply buying a house, well that is a different situation entirely. Of course, a homebuyer could easily cash out the crypto they have and use those funds for a downpayment — or even to buy a house outright — but we don’t see more of this today as they understand selling their currency is a taxable event and, more than likely, taxes owed will hit their balance sheets pretty hard.
Knowing that this is a real issue in the market, it should come as no surprise that a company has come up with a plan to overcome what is seen as one of the biggest obstacles to using digital currency for home buying.
That company is Milo, which claims to offer the world’s first “crypto-mortgage.” Essentially, they will allow borrowers to use Bitcoin — but only Bitcoin as of right now — as collateral for a 30-year mortgage.
How this works is pretty simple. All buyers have to do is to “pledge” their coins — on a one-for-one basis. Simply put, someone looking for a $500,000 mortgage would have to put up $500,000 worth of Bitcoin. This way, they don’t actually have to sell their coins, so there are no tax implications.
Instead of going through a FICO credit check and showing proof of income to evaluate a borrower’s creditworthiness, Milo evaluates them based on their crypto wealth as well as the value of the property they are hoping to buy. In exchange for locking up their crypto, borrowers get a 30-year mortgage for their home purchase can also make their mortgage payments via traditional currency or Bitcoin.
But there are differences between this and a traditional mortgage. First is the interest rate. It currently ranges anywhere from 5 percent to 8 percent, depending on the loan-to-value ratio — and this is higher than the rate they could get today.
The interest rate is not fixed, but variable, and based on the prevailing price of Bitcoin. The rate can go up or down depending on the value of the Bitcoin the buyer has pledged; this mortgage rate will be adjusted every year.
Interestingly, if the price of Bitcoin goes up, borrowers can actually take back some of their crypto once a year. If the price of Bitcoin goes down, they may be asked to provide more crypto as collateral.
Finally, when the buyer sells, on closing Milo is paid back in U.S. dollars and then the seller gets the Bitcoins they used for collateral back, along with the profit made on the sale.
I think that this is certainly an interesting play in the ownership housing sector, and although still in its infancy, looks to meet the needs of crypto owners who don’t want to face the tax obligation that would occur if they were to sell their coins to buy a home.
Now, I must make clear that Windermere is certainly not endorsing Milo. In fact, I have concerns about the program given how volatile cryptocurrencies are.
You see, it is possible that users may be caught out by the value of their Bitcoin dropping significantly and, if this occurs at their anniversary date, it could significantly raise the interest rate — and therefore monthly payment — on the loan. If the price drops too far, then they may have to go through what is, in essence, a margin call, where they will have to submit more funds to the lender to bring them back to a point where equity in the home combined with the value of the Bitcoin covers the loan itself.
If for some reason the buyer has to sell the home within the first three years of purchase, there are pre-payment penalties that will be incurred.
All in all, it is an interesting model, but it is still in its infancy. As always, time will tell how well it gets adopted.
The bottom line for me is that the likelihood of cryptocurrency revolutionizing the way we buy homes from a finance perspective is still several years away, but after that, who knows?
Something that has the capacity to be adopted into the mainstream far quicker is the blockchain technology itself. I personally see title insurance as a segment that could benefit significantly and may well adopt this tech sooner than others.
With title insurance companies responsible for verifying and ensuring that a buyer or lender (depending on the type of title insurance) gets either clean ownership or a lien position in the land in question, blockchain could change many aspects of how these processes are carried out. Here are some of the benefits:
More than 25 percent of title reports detail some form of defect to the title, but the ability of blockchain to immediately detect erroneous or potentially fraudulent information can significantly help to support the reliability of the records, therefore making the job of title insurance companies much more straightforward.
Smart contracts are actually a form of e-closing that is already beginning to be embraced by some in the industry. This technology makes the transfer of ownership almost seamless — literally, it would take just a few “clicks.” This is also a massive benefit for the industry as the closing process would also change dramatically and become far more effortless and less time-consuming than today’s standard means of closing on a home purchase.
While fraud and tampering are huge concerns for title companies, blockchain could all but eliminate these instances within ownership records and, as it would convert land records to a distributed ledger, it cannot be altered within the blockchain itself, therefore making it safe in perpetuity.
Blockchain, by design, prevents bad information from disrupting the chain and any attempt to tamper with it can be easily detected and, therefore, avoided.
This is a massive upgrade from the county ledger that title insurance companies find themselves working with today.
No one can deny that blockchain and cryptocurrencies — while still relatively new — do not appear to be just a flash in the pan, and a number of companies continue to make inroads into the real estate world.
Will some fail? Of course, they will. But others will succeed, so while still in its infancy, we should all have some sort of understanding of its potential to be a disruptor in the housing space.
It’s my own personal belief that the blockchain tech itself will be the thing that gets adopted by the real estate world faster than the rise of crypto as a way to buy or finance a home, but whatever your thoughts on this topic are, I think that it is highly unlikely that we will see it simply fade away over time.
To get the big picture including all of the data, watch the full video above.
Matthew Gardner is the chief economist for Windermere Real Estate, the second largest regional real estate company in the nation.