Crafting Next-Generation Real Estate Deals

Last December, a pair of homeowners — Las Vegas-based Jack Sommer and Connecticut-based Philipp Preuss — attracted national media attention in their attempts to sell their respective residences. In what could become a new chapter in real estate history, Sommer and Preuss announced that they would accept payment of their properties in Bitcoins.

Preuss decided to accept Bitcoin payment on his $799,000 four-bedroom home after it sat on the market for two months with nary a peep of interest. Preuss is a Bitcoin investor and decided to open his sale to fellow supporters of the digital currency.

I’m not saying it will replace any other currency,” he said in an interview with the daily New York newspaper Newsday, “but there is a place for it in this world.”

Over in Las Vegas, Sommer, a casino owner-turned-commercial developer, got the idea of Bitcoin transaction to cover the $7.85 million price tag on his 25,000-square-foot mansion from his sons, who are involved in Bitcoin currency trades.

“The advantage is that we’re expanding our market and adding some notoriety,” Sommer said in an interview with the Associated Press.

Bitcoins have been around since 2008, but until recently they were barely acknowledged by the U.S. business community and mainstream media. In recent months, Bitcoins have become more prominent. In January, became the first U.S.-based online retailer to accept Bitcoin payments. The popular online game site Zynga is also accepting Bitcoin payment for those eager to indulge in FarmVille 2 and other digital distractions.

One story that went viral involved a pair of little girls in San Francisco running a sidewalk lemonade and cookie stand — these little cuties happily accepted Bitcoins alongside the traditional dollars and cents. The kids made .083 Bitcoin on their goodies, which translates into about $70 — either these girls have damn fine lemonade or they have already learned the primary real estate lesson regarding “location, location, location.”

If you are not familiar with the concept, this is how it is supposed to work: Bitcoins are a virtual currency, which means they only exist online. Unlike national currencies, they are not regulated by central banking authorities. Their value can be purchased through exchange websites with a national paper currency, but there is no regulation in place to monitor that kind of training.

So how can you use a currency that doesn’t crinkle up in your wallet? The Wikipedia website explains it this way: “Users send payments by broadcasting digitally signed messages to the network. Participants known as miners verify and timestamp transactions into a shared public database called the block chain, for which they are rewarded with transaction fees and newly minted Bitcoins.”

As you might imagine, Bitcoins have inspired a great deal of agitation and generated more than a little controversy since their introduction. A major PR debacle occurred last year when federal law enforcement agents shut down the Silk Road online marketplace, where Bitcoins were used to purchase illegal drugs. For many Americans, the Silk Road shutdown was the first time they heard about Bitcoins. But for those who spend more than a few hours a day online, Bitcoin acceptance has become a way of life, with major websites including WordPress and Reddit accepting the currency.

One of the problems in having a wider acceptance of Bitcoins for real estate finance transactions is that American law has not quite caught up with this digital currency. Bitcoins are subject to federal money transmitter regulations, but questions relating to taxation are still vague, and the new use of Bitcoins as an acceptable currency for the purchase of luxury real estate raises a surplus of questions for which easy answers are currently not available.

Will Bitcoin transactions become the new force in real estate finance? If the aforementioned Sommer and Preuss properties are any indication, it would appear that homebuyers are looking for wealthy buyers that don’t need to take out a mortgage — in these cases, a few clicks on a computer keyboard will secure the transfer of funds needed to secure homeownership for potential buyers. However, the number of buyers that can buy a $7.85 million house without having to fill out a mortgage application is fairly finite — even in the best of economies — and this type of transaction could easily be seen as a niche within a niche.

But suppose that Bitcoins gain more popularity and retail acceptance. How will today’s lenders adapt to the arrival of Bitcoin-based transactions? And, for that matter, can Bitcoin home purchases exist without raising a peep of concern from the industry’s regulators, especially the Consumer Financial Protection Bureau? After all, the European Banking Authority has warned about the lack of consumer protections surrounding Bitcoins — in comparison, Richard Cordray and his crew have yet to make a two-cent deposit in the debate.

While the industry is still at the earliest stage of the story, there is no reason why efforts should not be made by the industry’s trade groups to investigate the potential of Bitcoins and educate lenders on what can be expected in a Bitcoin-driven economy. It would be a mistake to leave the Bitcoin issue for other entities to decide upon. If lenders have the potential of originating Bitcoin transactions, it should be incumbent upon the industry to determine how this could work.

As of this writing, both Sommer and Preuss still have their respective properties on the markets. Until the first sale comes in, the notion of a Bitcoin-purchased home is still a nebulous but entertaining idea.

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