As metaverse real estate has rapidly grown as an asset class, it was only a matter of time before lenders got in on the game. With prices for digital “land” plots in the most popular metaverses -- such as Sandbox, Decentraland and Superworld -- rivaling or exceeding that of physical properties, funding such investments with ease has been a growing focus.
And a number of players have stepped out of the woodwork to provide that service.
Just last month, the first ever “metaverse mortgage” went on the books for the purchase of a plot in Decentraland. Made in Ethereum -- one of the most commonly-used cryptocurrencies in the metaverse space -- the deal was facilitated by Vancouver-based Web 3.0 company TerraZero Technologies. Billed as a “vertically integrated metaverse technology company”, they’ve developed a metaverse mortgage service to offer clients “who intend to finance the acquisition and purchase of virtual real estate.”
While the financial terms and identity of the client is unknown, TerraZero revealed how the mortgage itself works; holding the digital property as collateral in the form of a non-fungible token, they collect monthly payments from the borrower until the loan is paid in full. In the meantime, the borrower is granted full “deployment rights”, giving them access to the plot, and the ability to build, develop, or utilize it however they like -- just like in a physical mortgage arrangement.
"TerraZero's vision is to build and provide the tools that bridge the real world with the Metaverse,” stated TerraZero’s founder and CEO, Dan Reitzik. “An entirely new economy is emerging and we want to enable entrepreneurs and others with similar products and services for the Metaverse that are available to them in the real world. Mortgages and financing availability will expedite the development and adoption of the Metaverse, and we are excited to be at the forefront of this new and exciting economy."
Not Coming to a Conventional Lender Near You
However, while the future of funding the metaverse may be friendly among private lenders, it’s highly unlikely that conventional banks will want in on the digital property rush anytime soon.
Leah Zlatkin, mortgage broker and expert at LowestRates.ca, says that while metaverse funding can be an exciting and lucrative opportunity for the private lending sector, there are currently too many unknowns for a conventional bank to enter the space.
“If we’re looking at the ways a lender assesses and values a property in order to lend on it, the appraisal and all of the things that are involved in determining the value of a property and its sellability in the future in order to get the lender their money back -- that’s all completely new in terms of doing that inside of a metaverse,” she tells STOREYS.
“A Totally Different Ball Game”
The current lack of understanding around how property is valued in the metaverse is a key component. The adage ‘location, location, location’ seems to hold as much stock in the digital market as the physical one; a plot next to the “Snoopverse” -- a plot owned by rapper Snoop Dog in the Sandbox metaverse -- reportedly sold for $450,000 USD.
However, proximity to a rapper’s digital abode is still a far cry from the strong guarantee of return required by most traditional lenders.
“The metaverse is just a totally different ballgame. I think a lot of lenders would not be very comfortable in that space right now, because there could be legal issues around who actually owns that property; what happens if the person who technically owns that property dies? There’s a whole lot of other issues surrounding this that may result in the lender not getting their money back.”
A second hiccup preventing traditional lenders from breaking into the metaverse space is its reliance on cryptocurrency -- another realm the Big Six is generally hesitant to dabble in. Whether Etherium, BitCoin, or LiteCoin, these decentralized forms of payment, which are often untraceable, present high levels of volatility that Canada’s banking system is not yet equipped to handle.
This is evident in their hesitancy to fund even physical mortgages with crypto. The big hurdle is ownership anonymity, making it hard to prove fund origination, and borrower income at the mortgage qualification stage.
Zlatkin says that while some of the larger lenders may make an occasional exception for a client looking to fund a purchase in crypto, they need to jump through some considerable hoops to show how the money was placed into the account, provide deposit and transfer slips, and prove ownership while the funds were maintained there.
But for the most part, she advises her clients to plan well in advance to ensure funds are timestamped and accounted for in time for mortgage funding; generally, insured mortgages require funds to be housed within a traditional bank account for a minimum of 90 days, while conventional mortgages require 30.
“In terms of a down payment, that’s where things get a little more sticky,” Zlatkin says. “Some of those cryptocurrencies will allow you to show your name as an owner within those crypto accounts, so the statements from the cryptocurrency would say [your name] on top of the statement, but there are other cryptocurrencies that won’t even have an ownership name, it’s just an account number, or key. And because of this, it’s very difficult to prove ownership, therefore most lenders would have a very hard time using those funds as part of a down payment.”
“If you’re my client and you say you have $150,000 in a crypto account and want to use that as your down payment, I’d say, ‘When do you want to buy the house? Let’s transfer that money today so we have a timestamp in our bank account of 30 days or 90 days’ history on this money.’”
Borrowers Need to Hedge Crypto’s Volatility
The other risk for crypto-heavy borrowers is its propensity to drastically fluctuate; as values can plunge overnight, that can be the difference between affording a home and defaulting on an agreement to purchase and sale. Due to this, it’s important that funds be made tangible as soon as possible.
“If today you’re sitting on $250,000 in crypto and you know you’re buying a house, and you need that as a downpayment -- that’s what you’ve committed to, and that’s how much mortgage you can afford -- and you don't transfer the money out today, what happens if, tomorrow, the market has fluctuated, and now you’re down to $175,000? You’ve already committed to the seller. If you need x amount of dollars, pull it out, and get yourself ready to make that purchase, not just based on the history of the money, but the fluctuations in that marketplace,” she says.
“It’s the same with stock: if you own a lot of stock, they’re not going to value your stock account. You can ask to pull the money into a savings account, and they’re going to timestamp when that money went into the savings account. And they’ll look at the history, and see, ‘Oh, you’ve got a tax-free savings account with money in the TSX (Toronto Stock Exchange) -- they’re going to timestamp it based on when you transferred it into your savings account, because that money is also volatile, it’s also always changing.”