NFTs cross the digital divide.
If you look past the tremendous hype surrounding NFTs, you can see the beginnings of how this new technology is being used to tackle real, fundamental problems that have long plagued financial markets.
One of the core problems in finance is high cost, high friction transactions. Nowhere is this more apparent than in real estate. Buying a home is miserable. It takes over 45 days and typically costs more than $30,000 in fees. What if buying property were 100% online, took a few days and the whole transaction cost $300? Seems impossible, but it’s already happening today and the solution is powered by NFTs.
Fabrica is a platform to sell properties online. Sellers list parcels of land on their website. Buyers can view parcels and purchase them 100% online in a matter of days. Sellers have already sold hundreds of parcels in this way. Fabrica has done what many have wanted to do for years, but largely failed to do. They have put real estate on the blockchain.
Putting something “on the blockchain” via an NFT is not an end in itself. What is more important is that Fabrica solves a real problem—lowering the costs and increasing the speed of transacting in the real estate market.
Here’s how it works. Under the hood, Fabrica places the property in a trust. The language of the trust then assigns control of the trust to the holder of a token based on ERC-721, the standard for Non-Fungible Tokens or NFTs. The trust is recorded at the county and the trust agreement states that whoever is in possession of the token is the trustee with full control of and rights to the underlying asset. All documents for the transaction are in the public metadata of the NFT. Fabrica has combined a well understood traditional legal instrument, a trust, with a more novel digital representation of ownership.
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Fabrica works with existing land sellers to power their checkout process. Head to Land Paradise, one of Fabrica’s clients, browse their listings, like a 10 acre plot in Duchesne, UT, and click “Buy Now”. Fabrica handles the rest— establishing the trust & NFT, transferring title, directing payments and regulatory compliance.
Fabrica’s use of NFTs is a market creating innovation. Today, the company primarily powers low-value land sales. Low-value land sales are particularly impacted by the high transaction costs endemic to real estate. High fixed fees and lengthy closing processes mean trying to sell a $30,000 parcel often isn’t worth anyone’s time. However, reduce the fees to $300, shorten the closing timeline to a few days and put 100% of the process online, and suddenly selling low-value properties makes sense in a way it didn’t before.
Economists love thinking about transaction costs and allocative efficiency. High transaction costs reduce allocative efficiency. Lowering transaction costs increases allocative efficiency, allowing assets to move more readily to a new owner who can put them to better use.
Real estate’s high transaction costs are a huge drag on the allocative efficiency of one of society’s most important assets, property. In the case of low-value land sales, that drag is so severe as to nearly prevent a market from even existing, but it’s true for other segments of the real estate market as well.
It’s easy to write-off what they are doing today. Selling a low-value piece of land online is far less complicated then selling a piece of residential real estate (and the market for low value land sales is a far smaller market than the $20 trillion residential real estate market). In land sales, you need to convince a small number of parties, really just the buyer and seller, to adopt. In residential real estate you need to convince many parties including mortgage brokers, real estate agents, title attorneys, the GSE’s etc before you can even get started.
However, Fabrica, like others applying of NFTs to novel problems, is following the classic path of a disruptive innovation—starting with simple applications at the bottom of an underserved market as a pathway to broader application down the road.
NFTs are hyped these days due to the spectacular gains individuals have made speculating on assets, but if you take a look deeper, the more exciting applications have nothing to do with speculation and everything to do with solving fundamental problems. It’s still early, but companies like Fabrica demonstrate how things are off to a promising start.
Negative Disclosure: I am not an investor in Fabrica.
