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May 24, 2022

Real Estate Transactions: Physical vs. Virtual

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In our previous NFT Newsroom posts, we explored the differences between virtual real estate and physical real estate as well as the process of leasing virtual land in metaverse. Today, we are focused on the comparison between the purchase transaction of virtual real estate in the metaverse and the purchase of real estate in the physical world.

Most real estate transactions, as we know them, start out with a non-binding term sheet, which sets out the key parameters of the deal. A few examples, though not an exclusive list, of the parameters you may find on a term sheet are the property address, the parties, the purchase price, the deposit amount, any closing conditions, the closing date, any closing contingencies and the duration and scope of the due diligence period (if applicable). The term sheet is generally negotiated between the parties themselves or through their respective brokers. It is important to note that, in most cases, term sheets contain the bare bones description of the deal. The real meat and potatoes of the deal are found in the contract.

In some cases, purchasers will have an opportunity to conduct due diligence investigations of the property. This could involve physical inspections of the property, title and survey review, an environmental study, review of the property's income-producing qualities (in the case of rental or retail properties) and a feasibility study (in the case of a raw-land purchase, to allow purchaser to confirm if it could develop what it is planning to develop on the land). This provides the purchaser with the opportunity to learn as much about the property before committing to the purchase. The terms of the due diligence period vary from deal to deal, but in most cases, it will either start before or after the contract is signed. If the due diligence period starts after the contract is signed, the contract will generally include language allowing the purchaser to terminate the contract if they are unsatisfied with its findings (a refund of the deposit will follow, unless the contract stipulates that the deposit is due after the completion of the purchaser's due diligence). A critical aspect of due diligence is the title and survey review. This involves the purchaser's review of a title commitment (a document prepared by a title company which shows the title defects affecting the property) and the survey of the property, which shows the boundaries of the property. Some common title defects you may find are existing easements affecting the property, property restrictions and recorded service contracts. The purchaser will generally provide a notice (often referred to as a "title objection notice") to the seller, title company and surveyor requesting the removal of certain items from the title commitment (if possible) and any revisions to the survey.

Assuming due diligence is completed (or will commence after execution of the contract), the next step in a real estate transaction is the contract phase. Simply stated, during the contract phase, the parties' respective attorneys negotiate the binding terms of the deal. Of course, this is much easier said than done as the parties' attorneys are tasked with negotiating the most favorable contract possible for its client to avoid the many pitfalls that could arise throughout a real estate transaction. Once the parties sign the contract (assuming due diligence is complete), the parties have a deal.

During the period of time between contract execution and closing, the purchaser will get its financing in place (if any) and the parties will prepare for the closing. Assuming there are no hiccups between contract and closing (the solution to which should be addressed in the contract), the closing will occur. At the closing, purchaser tenders the balance of the purchase price and the parties sign the closing documents and pay their respective closing costs. Purchaser's closing costs may include title insurance (depending on the state), the cost of a new survey, attorneys fees, mortgage recording taxes (if applicable), financing fees, and any other third-party fees. Seller's closing costs may include the cost of the purchaser's title policy (depending on the state), state and local transfer taxes, the cost to payoff any existing mortgages, attorneys' fees and other third-party fees. The purchaser's title to the property is memorialized via a recorded deed in the land records of the county where the property is located.

Of course, this is a brief overview of the purchase transaction of real estate in the physical world. The actual process involves much more than can be described in a short article. It is always recommended to consult with an experienced real estate attorney before engaging in the purchase of any real estate.

The purchase of virtual real estate is quite different than the purchase of physical real estate. The purchase of land in the metaverse is usually carried out using cryptocurrencies such as Ethereum, SAND (the currency connected with the metaverse platform The Sandbox) or MANA (the currency connected with the metaverse platform Decentraland). Purchaser of land on the The Sandbox or Decentraland platforms can be made directly from the platforms themselves or via a third-party resellers market. Because the transfer of ownership of virtual land is recorded via transfer of NFTs, you also need a wallet capable of storing NFTs.

The purchase of virtual real estate differs from the purchase of physical real estate in that the purchase of virtual real estate (at least currently) does not involve the considerable amount of due diligence, title and survey review and contract negotiation required for the purchase of physical real estate. One can simply logon to a metaverse platform and purchase a plot of virtual land that is available for sale.

There is a possibility, however, of future metaverse real estate transactions mirroring physical real estate transactions more closely. This largely depends on the matter of "scarcity" as it applies (if at all) to virtual real estate. Land in the physical world has consistently increased in value largely due to the fact it is a finite resource, and the population of people with an interest in owning it is constantly growing. In the virtual world, the amount of land available is potentially unlimited, however if metaverse developers decide to limit the amount of virtual real estate plots on their platforms, this could create a higher demand for virtual real estate, causing prices to increase along with the complexity of the transactions. For example, future purchasers of virtual real estate could look more closely at the income-producing qualities of a particular plot of metaverse real estate before placing an offer and more extensive contract negotiations may be necessitated in a more competitive market. This is certainly something to keep an eye on as the demand for a virtual presence in the metaverse increases and virtual land becomes a increasingly useful asset.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

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