In just a few short years, the public’s perception of cryptocurrency has evolved dramatically.
It began with many first seeing it as a novel but impractical idea, then as a scam, then as a valid but volatile investment, and now, it’s finally starting to be seen as a legitimate form of currency for all kinds of transactions.
More recently, it’s even been gaining ground in real estate transactions. This is surprising considering how far behind the industry is when it comes to technology. But things have progressed rapidly. The first NFT real estate sale took place in Gulfport, FL in February 2022, and more recently, the largest-known real estate deal of using crypto in America was a Miami Beach penthouse that traded for $22.5 million.
While there are advantages to buying real estate with crypto, there are also some disadvantages as well. Let’s address the disadvantages first.
Most sellers, as well as most real estate professionals, simply don’t understand cryptocurrency yet, let alone how to conduct a real estate transaction with it yet. That can make it difficult to conduct a transaction this way because the seller, both Realtors, and title professionals involved in the closing all need to understand cryptocurrency. This may be possible in major cities where people tend to be more tech savvy, but it’s unlikely in many areas.
The reality is that the process itself is pretty straightforward and is no different than using traditional funds—with one exception. Rather than money moving between two banks upon closing, it moves from one crypto wallet to another. Paul Lizell, a real estate investor and educator, says “Timing can play a critical role as well, if you send the funds in a volatile market you could actually lose value against the US dollar if the crypto market is going up. Also if you use a crypto like Ethereum, you could pay high fees ranging in the thousands.”
For the most part, every other aspect of the closing process remains the same.
“Crypto transactions are not complicated as they seem. Especially if you are working with an experienced seller. As it becomes a more accepted form of payment, you will find more companies willing to share the steps to open a wallet, or third party providers that can assist with the transaction,” says Denis Smykalov, with Wolsen Real Estate—a real estate brokerage that has conducted multiple real estate transactions using cryptocurrency.
Lizell recently purchased a property this way. He shared his experience, saying, “Last August I purchased my home in Naples FL and I used $100,000 worth of Bitcoin as my down payment towards the purchase. This transaction was handled by Bitpay, which converted the Bitcoin to US dollars in real time.” This approach meant that the seller didn’t even have to understand crypto, but it can further complicate a deal.
And cryptocurrency is volatile. In the past twelve months, Ethereum, one of the more popular and relatively more stable coins available today, has fluctuated between $1,722.90 to $4,811.70. This means that if you had planned to purchase a $600,000 property, you would need roughly 125 of this particular coin to complete the transaction. (You’d actually need slightly more, or you’d need to bring additional traditional funds to cover closing costs, but there’s no need to over complicate it.)
So let’s say you signed a contract to purchase a property at Ethereum’s peak on November 8th, 2021, but didn’t get to the closing table until January 27th, 2022, which wouldn’t be surprising considering the holiday season, appraisal and inspection backlog, and other delays caused by the pandemic. By this date, Ethereum had dropped by nearly fifty percent to $2,425.17! This means you would have had to either bring another 125 coins or $300,000 in traditional funds to the closing table, and if you couldn’t do that, you would be on the hook for penalty fees for breaking the purchase contract. That’s a pretty big disadvantage.
Smykalov says, “Market volatility has been a problem in the past, but by using a third party company or attorney, they can facilitate the transaction and convert crypto to US dollars. Other options include choosing stable coins that equal US dollars 1-1.”
But the advantages of purchasing with crypto can be significant too.
When buying a property with cryptocurrency, you’re typically dealing with a very different type of seller, which means they may be open to more unconventional terms. Whether you’re a homebuyer looking for a home to live in or you’re a real estate investor looking to add more properties to your portfolio, this gives you more ways to make a deal viable that might not be otherwise. That becomes even more important the more competitive the real estate market becomes. It’s worth noting that it’s already extremely competitive, becoming more competitive every day, and showing no signs of slowing down anytime soon.
And sellers who understand crypto also understand that the balance in a wallet or cold storage is just as good if not better than cash in the bank. This can give you a powerful advantage over traditional buyers who are relying on financing because you can close faster and the seller will get their money immediately. Anyone who has tried to purchase a property lately knows that you need every advantage you can find in this hypercompetitive market.
Taxes are another area where cryptocurrency offers advantages over purchasing a property using traditional funds.
In the past, if you had made a killing in crypto, you basically had two options—continue holding it to delay taxation on your gains, or sell it and pay a capital gains tax. However, now that it’s starting to be accepted in real estate transactions more frequently, you have a third option, which is to use it to directly purchase a property.
In doing so, you will face taxation on your capital gains from the appreciation of your cryptocurrency because you’re essentially cashing it in. But because you’re purchasing real estate with it, you’ll now be able to enjoy tax benefits that only real estate can provide. While you’ll take an initial tax hit, this transaction can be a powerful tax deferment strategy from that point on using depreciation and 1031 exchanges, which creates a significant compounding effect.
It’s important to note that you should make sure the tax professionals you work with have deep expertise in both real estate and crypto. Especially the latter because the tax laws on crypto are still unfolding and there is a lot of gray area, so it takes a true expert to keep you on the right side of the law here.
And as a seller, accepting cryptocurrency as a payment method often means a larger pool of potential buyers. More buyers typically means a higher final sale price, driven by bidding wars, which means greater profits for you.
Ultimately, crypto is here to stay, and it’s playing a growing role in real estate, so smart buyers and sellers will leverage this trend early on to maximize their returns. Eventually it will become commonplace, but leading up to that, you absolutely should make the most of the advantages it creates for early adopters.