L.A.’s Real Estate Industry Enters The Age Of Bitcoin
A little over a year ago, in a first for Southern California, a buyer used roughly 3,300 bitcoins to buy a Cape Cod-style mansion in Manhattan Beach for $3.225 million.
Had he waited a year, that same number of bitcoin could’ve bought multiple beach houses, a few penthouse condos and a private island in the Caribbean. So it goes in the volatile get-it-while-you-can nature of cryptocurrency deals in the real estate industry.
Bitcoin is an open-source digital currency that, through its peer-to-peer exchange system, avoids the need for banks. Its value has increased tenfold in the past year, leaving investors scrambling to make a profit off the tumultuous chaos.
A bitcoin real estate transaction is the confluence of two extremely bubble-prone fields. Although the technology is still in the early stages and few people are actually buying goods with the currency, real estate presents a compelling use case for bitcoin in the real world— even though spending it to buy a home can lead to a legion of unforeseen frustrations.
Already, a handful of bitcoin-seeking luxury real estate listings have popped up around the country, and experts predict the digital currency could grow to be a viable means of home buying.
“Within the context of real estate, it makes sense to use cryptocurrency in those types of transactions,” said Neeraj Agrawal, director of communications at cryptocurrency-focused think tank Coin Center. “Cryptocurrency is a way to send large amounts of money pretty easily with relatively low fees and little interference from middlemen.”
Given the advantages of cryptocurrency compared with cash, Agrawal said that if it does catch on, it’ll likely be used to buy things like homes or cars rather than inexpensive goods like Metro swipes or cups of coffee. Brands including Subway, Microsoft and Overstock.com accept bitcoin.
In San Diego, a company brokering the sale of two multimillion-dollar homes in the affluent community said this month that it would accept bitcoin as payment. The custom-built homes are listed for sale for $19.8 million, the equivalent of roughly 1,750 bitcoins. Sellers will also accept cash.
“We realized there is so much new wealth in the crypto space,” said Andrew Canter, chief executive of real estate brokerage and investment firm Canter Companies. “There are a lot of new buyers and a lot of people that have seen their wealth fluctuate over the last year.”
Canter is selling his own home and his friend Alan Ezier’s. He said accepting the bitcoin for the purchase was a different way of marketing the homes by getting the properties in front of an untapped group of potential buyers.
If the buyer pays in bitcoin, Canter said the sellers plan on taking steps to manage the potential risk. He said they will likely use an investment bank that will write a futures contract to lock in for several months whatever bitcoin is valued at when a sales deal is struck. Futures are a contract to buy or sell an asset at a specific date for a specific price.
“It’s a personal preference when it comes down to it,” Canter said. “I don’t think we can speak to a financial benefit here or there. Obviously, the chance (bitcoin’s value) goes up is just as much as it goes down right now.”
There is no real tax advantage to selling a home for bitcoin, said accountant Vincenzo Villamena, a New York-based expert in digital currency. If the seller then resells the bitcoin, they may have to pay capital gains taxes so it cuts into money earned on the sale, he said.
Villamena said anyone involved in the transaction looking for secrecy would have trouble because home sales are rigorously documented.
“If you think (bitcoin) will go to the moon, then sell a house and the coin might be worth 10 times that in the coming years,” he said. “If you (as the buyer) think it will go to zero, then you might have gotten yourself a free asset.”
One of the first reported single-family homes purchased with bitcoin took place in September in Austin. When Kuper Sotheby’s International Realty facilitated the sale, bitcoin was worth $3,429. The firm said it converted the bitcoin to dollars in 10 minutes to give to the seller.
In that case, the bitcoin buyer missed out on a substantial price increase in the coming months. Bitcoin hit a high of $19,343 on Dec. 16 and has since slid back to $10,319 as of late Wednesday, Coindesk said.
Similar scenarios played out in Manhattan Beach last year.
At the time of the January 2017 purchase, it cost 3,300 bitcoins to buy the home for $3.225 million. At its value a year later, 3,300 bitcoins equals around $34 million – which is likely a hard pill to swallow for both the buyer and the seller, who had the bitcoin immediately converted into cash, according to Mike Michalski of RE/MAX Estate Properties, who co-listed the property with Sachi Fujita.
In late April, when the price of one Bitcoin hovered around $1,400, a buyer paid roughly 1,285 Bitcoins for a 1960s custom-built home in Manhattan Beach for $1.8 million. Today, that same amount would buy a home worth $13.3 million.
One challenge with using bitcoin is that it’s still so new that many companies involved in a typical home-buying transaction are unfamiliar with how to process deals involving crypto.
Justin Miller, a Realtor whose agency, Beach City Brokers, represented the buyers in both Manhattan Beach deals, wasn’t sure where to start when trying to incorporate bitcoin into the sale.
“I started asking around to different escrow and title companies to see how I could put the deal together, but I was getting the door shut on me,” Miller said. “No one wanted to deal with bitcoin. They didn’t understand it.”
Usually, these companies hold and regulate the payment between the buyer and seller, but with the ambiguity and rapid fluctuation of bitcoin, some refuse to get involved.
Josh Cincinnati, executive director of the Zcash Foundation, planned to buy a house in Virginia with some of the cash he’d accumulated through his bitcoin investments.
His loan officer at Chase, however, told him that the bank wouldn’t consider the money in his bank account as part of the liquidity required to approve a conventional loan because they weren’t sure of its origins.
“The loan officer said the documentation I provided wasn’t enough to prove that the amount deposited in my account was received from a legitimate trade,” Cincinnati said.
To go above and beyond the two months of bank statements Chase required to approve the loan, Cincinnati provided a full history of his cryptocurrency transactions for the last two years – to no avail.
Fearing the delays would threaten the home sale, he sought a loan from Fulton Mortgage instead. He received full approval there, but not before he was forced to renegotiate an extension of his mortgage approval stipulation in his purchase contract with the seller.
That’s not the only challenge the emerging payment form represents for the industry. How do you provide proof of funds when the funds don’t physically exist?
“Proof of funds for a bitcoin sale literally requires the buyer to sit down with a smartphone, open a blockchain app that displays the total value of their bitcoin and show that to the seller,” Michalski said.
“Both the buyer and seller wanted to make the deal happen, but this is all new,” Michalski said. “There’s just not a lot of understanding or documentation.”
With buyers eager to cash in on the historically high prices, and sellers offering up homes as a way to get a piece of the pie, deals are happening regardless of the hurdles.
Bloody Bay, a 13-acre slice of beachfront land in the Caribbean, is currently on the market for 400 bitcoins, with no cash offers being accepted.
In addition, websites are popping up that allow anyone to list a property for bitcoin.
Homeowner Alex Bartilotti put his home in Portugal on the market for $1.2 million, but found no interest after two weeks. He updated the listing, adding that he’d also accept 100 bitcoins, and immediately received six inquiries about the home.
Whether bitcoin will further integrate into the real estate industry is largely dependent on the markets. In the meantime, Miller’s getting a head start.
His brokerage handled three bitcoin real estate transactions last year, and they had three listings with a bitcoin payment option hitting the market in February.
Pointing to Amazon’s new “no checkout” grocery stores, he said, “People are getting more savvy in the ways they pay for things. At the end of the day, if there’s an easier and more efficient way, and if bitcoin is able to eliminate wires and banking fees, it will have a future.”