Virtual Real Estate Creates New Legal and Public Policy Considerations

January 10, 2022

Amid the current “real” housing market, investors all over the metaverse are grappling to get a piece of virtual real estate. What is this virtual real estate, and what makes it different from “real” real estate? In online games that are part of the metaverse, games like Decentraland and Sandbox, players can buy NFTs to corresponding parcels of the land in-game and become virtual property owners. The hope for investors is that the land will increase in value as more players join and owners can cash in on the property value increase. However, the idea behind the value is the scarcity of properties on these platforms and not necessarily what can be done on the land. These ventures do not come without risk: property value could theoretically go to zero if a game loses popularity. Now, however, real estate plots are selling for millions of dollars and the prices are only increasing. In November, a virtual Real Estate firm purchased a parcel of land on the virtual game Sandbox for over $4.3 million. Republic Realm, the virtual real estate firm that purchased the record-breaking virtual property, allows investors to invest in their portfolio with a minimum of $500,000. Numerous organizations are purchasing virtual real estate as part of their business portfolios. Tokens.com plans on creating a virtual high-rise to lease to lawyers and crypto exchanges—the company also plans on developing a virtual shopping district similar to Fifth Avenue or Rodeo Drive. Not just companies are interested in virtual real estate. The island nation of Barbados is building a virtual embassy on the online platform Decentraland that is only going to cost the country $5,000 to $50,000 to build—a fraction of what a “real-world” embassy would cost.

In November, a virtual Real Estate firm purchased a parcel of land on the virtual game Sandbox for over $4.3 million.

NFTs have also made their way into the “real” real estate industry. Real estate is either owned as an entire asset or through fractional ownership, like crowdfunding real estate ownership. Real estate projects owned through fractional ownership are easier to “tokenize” into NFTs because the project is already divided into shares and the SEC regulates them as assets. Entire asset ownership raises problems if owners want to tokenize the asset—they would have to convert their ownership into an NFT deed and real estate regulation can affect this process. EA tokenization could lead to a change in the way investors handle real estate. For example, it could digitize and streamline the entire closing process and buyers and sellers can instantly transfer the assets.

Some also argue that virtual real estate can drastically change the current “real” real estate market aside from NFTs’ influences. One author argues that the metaverse can aid real home buying by showing prospective homebuyers the houses virtually. In the age of COVID, this has helped buyers see a property without stepping foot inside and therefore people are better equipped to make quick buying decisions in a real estate market that is moving faster and faster.

A screenshot taken by the author, Nash P. Joyner, while in Decentraland.

Virtual real estate might offer new opportunities for attorneys interested in helping prospective investors looking to ride the wave. First, attorneys would help draft virtual lease agreements between property owners and tenants. Second, multi-owner virtual ownership could become confusing without agreements in place between business partners detailing the necessary rights of each virtual owner. Decentraland offers the opportunity for multiple users to have access to virtual plots and therefore it would help owners to have a legal agreement documenting how each can use it. Lastly, lawyers will have to become more apt to change if closing times are drastically dropping and buyers are ready to purchase houses and mortgages sight-unseen with changing real estate practices in the metaverse and the real world. Virtual real estate poses some interesting public policy questions as well. First, virtual real estate is not backed by a real piece of property or any sort of structure, and therefore property values could go to zero. This is similar to those to choose to invest in Bitcoin or other cryptocurrencies that could also lose off of their value, and the Fed is looking into ways the banking industry is being affected by holding crypto assets. Virtual real estate is also not subject to the same zoning and housing regulations and is not subjected to property taxes by any governmental entity. Administrators, however, can implement zoning in the online world. One final public policy consideration is taxation. As mentioned earlier, these properties are not taxed through property taxes, and they are also not taxed on the sale through services like OpenSea.

Nash P. Joyner

Although Nash studied political science as an undergrad, if he could do it again, he would have studied computer science before attending law school. He loves to learn about the intersection of law and technology and hopes to serve as in-house counsel for a tech company.

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