Portland Real Estate Market 2022 Forecast
12/08/2021
Portland Real Estate Market Fall Update
10/06/2022BUYING REAL ESTATE WITH CYPTOCURRENCY
With the rising momentum of the cryptocurrency market more and more people have been asking how to buy real estate with cryptocurrency. The real estate and lending industries are slow to accept change and technology. The adoption of crypto for direct purchases is some years off but that doesn’t mean you can’t sell your cryptocurrency holdings to purchase real estate now. Let’s review the rules you need to follow when buying real estate with cryptocurrency.
What is Cryptocurrency and How Does it Work?
Cryptocurrency (or “crypto”) is a form of digital money that has been created to act as an alternative to the conventional currencies. It was invented in 2009 when Satoshi Nakamoto, an anonymous person or group of people, released the Bitcoin protocol. Cryptography lies behind its creation and it uses decentralized control, usually by means of a peer-to-peer network, to ensure the security of every transaction.
Instead of being managed by a central authority, like the dollar in our current financial system, cryptocurrency is in digital form and can be produced (“mined”) with computer processing power. It also uses cryptography to control the creation of units and verify transactions.
Cryptocurrencies offer a quick and efficient method of transaction. This opens up tremendous opportunities for those who have been excluded from the economic system due to lack of documents or financial background.
There are thousands of different cryptocurrencies to choose from. Bitcoin and Ethereum are the two major players and comprise more than half of the market capitalization.
Can You Buy Real Estate Directly with Your Crypto?
If you’ve made money on your cryptocurrency investments, you may be considering buying a new home with it. The one question you might be asking: can I buy real estate directly with my crypto? The answer is no, not right now – without the rare exception. There have been a few cases where buyer and seller agreed to exchange a house for bitcoin on a set date. However, expect this space to develop rapidly over the next few years.
Buying a home with cryptocurrency isn’t obviously straightforward, but it’s not impossible either. First of all, you’ll need to exchange your crypto for US Dollars. Similar to selling stock holdings and converting to cash, this step is currently required for crypto funding with traditional escrow companies.
Are you funding the entire purchase with cryptocurrency sales or using some for down payment for a loan? Not all lenders are Ok with using cryptocurrency sales as down payment for property purchases.
Either way you will need to sell your crypto and deposit the proceeds into your bank account for 60 days. It’s possible to show just one month of bank statements if there are no other deposits to the account. This is a requirement for seasoned funds.
You Need a Paper Trail
If you are planning to use a crypto sale as a down payment for a new property make sure you have a paper trail of all your purchases and sales. Keep in mind, that every time you sell or exchange your cryptocurrency investments and there is a profit, it is subject to taxation just like any other kind of capital gains.
When you apply for a mortgage, your lender is required by the federal government to keep track of all of your money used towards the down payment and closing costs. This includes a comprehensive evaluation of financial transactions from the previous 2-3 months in all bank accounts, retirement funds, and so on.
If you’re applying for a standard loan, lenders are currently unable to accept cryptocurrency as legal tender for down payment and closing costs. If the mortgage underwriter discovers a bitcoin deposit in your regular bank account and tracks it back to its source, and learns that it’s cryptocurrency, they may eliminate it from the funds needed to close.
Lenders are required to follow the guidelines set by Fannie Mae & Freddie Mac for conventional loans. Here is their current position on crypto:
- All crypto is treated the same regardless of the coin (Bitcoin, Ether, Doge, etc).
- Crypto can be used as a down payment if it is first converted into US Dollars, not USDC, Tether, or other stablecoin.
- Proceeds must be held in a FDIC insured bank account and “season” for two months.
- That bank statement must be provided as documentation.
- The statement should not show a recent crypto deposit, meaning in the “activity section” there is no recent transfer/wire from Coinbase for example.
- Income from cryptocurrency trading or “staking” or other methods does not count.
- Any loans in US dollars against crypto assets do count against the borrower’s debt-to-income ratio.
The Future of Crypto and Real Estate Transactions
Real estate transactions may be completed far more quickly with the help of blockchain technology. Because users have access to all of the information stored in the blockchain, they may save a lot of time gathering data about a property or plot – title deeds, land registry, technical data, surveys, co-ownership records, and more. Furthermore, blockchain technology is resistant to unauthorized intervention and tampering, making it an effective means of documenting the transfer of ownership rights – a critical component of any real estate transaction.
Smart contracts are intended to automate value exchanges in the form of cryptocurrencies, which is the most common use case. These transactions involving digital values are recorded automatically in the blockchain, making them visible and irreversible. The terms of these smart contracts eliminate any room for argument or interpretation that may exist in our day-to-day financial interactions.
New platforms are working to use smart real estate contracts to facilitate property purchase and rental agreements. Real estate agents may save time and money by eliminating the need to rely on third parties, using a blockchain-based escrow platform to speed up real estate purchase and sale procedures.
Eventually, in my opinion, direct exchange of crypto for real estate assets will be common. By 2030 the real estate transaction will look entirely different. Escrow companies may not be needed with blockchain transparency and smart contract applications. The existing structure could be flipped where you may be required to purchase crypto tokens with your US Dollars in order to purchase properties on some platforms.
It is still very early in the blockchain revolution and the adoption of cryptocurrency for physical purchases. As crypto volatility decreases and smart contracts become more common expect cryptocurrency real estate transactions to grow exponentially. In the meantime, keep track of all your crypto activity for future use in purchasing real estate.
If you have any questions or comments about crypto and Oregon real estate please reach out to me anytime.
