The crypto test cases

Matthew Hansen’s dream house used to be a monastery.

The hedge funder bought a Hell’s Kitchen townhouse from the Archdiocese of New York for $3 million in 2011. He gut-renovated the six-story property, which had housed the Christian Brothers for more than 50 years, into a single-family mansion with a restored 1910 facade and an expansive, six-bedroom interior.

Then Hansen put the mansion, which sits at 416 West 51st Street, back on the market for $15 million in 2016. “It was kind of my dream house,” he told The Real Deal. “But now I have 7,000 square feet, and I’m living in only 1,000 of them.”

Like many luxury listings, the property languished on the market and is now listed with the Corcoran Group for nearly $12 million. But unlike most listings, Hansen is accepting digital currency as payment. He even posted the home on bitcoin-realestate.com, a global listings site that launched in 2013 for buyers and sellers interested in trading in cryptocurrency

416 West 51st Street

Hansen is one of a small but growing group of New York homeowners and real estate players testing the use of cryptocurrency — the decentralized and encrypted currencies such as Bitcoin that bypass standard financial institutions — in residential deals.

And it’s not a coincidence that he’s an early adopter. The Wall Street veteran launched a hedge fund called Crypto Knight Capital, which invests in digital currencies and other crypto assets, in January.

“It helps that I’ve been involved in cryptocurrency,” Hansen said. “I have the infrastructure in place to take it, and I’m very comfortable with the asset class.”

While there are few statistics on how many real estate deals have been done in crypto, sources say the handful of deals that have been publicized — both in New York City and beyond — are important test cases for the market. As of late May, there were 47 homes listed on Zillow nationwide, including four in New York, that mentioned Bitcoin.

In all respects, those sellers are laying the groundwork for the broader use of crypto in residential sales and rentals — or at least determining whether there will be a broader use. And although some say that could pave the way for more black-market buyers, others see it as a necessary litmus test.

“What we may need is for some people to have these transactions in Bitcoin, so we can start gauging the pros and cons, and what the pitfalls are so that we can build on it,” said Shahriar Sedgh, a real estate lawyer with the Manhattan-based firm Sedgh & Zuckerman, who has advised clients on the use of cryptocurrencies.

First come, first serve

Ben Shaoul, the head of Magnum Real Estate and the industry’s most prominent Bitcoin proponent, was the first developer to accept the digital currency.

When Shaoul launched sales at Liberty Toye, an 81-unit rental-to-condominium conversion at 62 Avenue B in Alphabet City, he specified in the offering plan that he would accept Bitcoin.

The developer said he then worked with the Attorney General’s office to ensure that doing so complied with the law. Shaoul declined to comment on the specifics. “I’m not going to give up my secret sauce,” he said, “but there is a secret sauce.”

He said his decision to accept Bitcoin in the first place was a direct response to demand from buyers. “Prospective buyers came to us and said, ‘Will you accept cryptocurrency?’” Shaoul noted. “That’s what compelled us to figure out how to accept it.”

The developer said he expects interest from buyers looking to pay for condo units with Bitcoin and other digital currencies to escalate. “A lot of the inquiries are from younger, millennial-style purchasers who have amassed large fortunes in cryptocurrency who are now looking to deploy their capital,” he said.

But those buyers will not be spending their digital cash at Liberty Toye. Last month, TRD reported that Shaoul entered into contract to sell the unfinished project to an undisclosed buyer for $85 million. Sources said Magnum plans to withdraw the offering plan and return deposits to buyers who’ve gone into contract. According to StreetEasy, at least 14 units — which had asking prices ranging from $675,000 to $1.6 million — are in contract. Shaoul declined to comment on the condo project changing hands, but sources said the property is expected to continue to operate as a rental.

Even before Liberty Toye, Shaoul said he was more than willing to take Bitcoin for an apartment in New York. In April, he accepted the digital currency for two units at his 33-story condo at 389 East 89th Street — one for $1.5 million and the other for $893,000. He then immediately converted that to U.S. dollars using the payment platform BitPay.

Several other homeowners in the city, including Hansen, have advertised in the past year that they’ll accept cryptocurrencies. At the moment, only two properties in New York include it in their description, according to Zillow.

Claudio Guazzoni de Zanett, another hedge funder, listed his Upper East Side mansion for $30 million, or $45 million in Bitcoin, in April. Guazzoni — who was hit with five violations under state law last year when he listed the property on short-term rental sites — told the Wall Street Journal that the difference in price is due to Bitcoin’s volatility, a sign that he may plan to hold the payment in Bitcoin rather than transfer it to dollars.

Meanwhile, in January, ManageGo, a Brooklyn-based rental management company, became the first to tout its acceptance of crypto coins. The company’s website says it accepts Bitcoin, Litecoin and Ether, and then immediately transfers the funds to dollars, but it appears that the functionality has not been rolled out yet. Brookliv, a Brooklyn-based brokerage that uses the ManageGo rental platform, accepts Bitcoin for deposits, and promotes its Bitcoin-friendliness on their listings.

Brookliv’s CEO, Ari Weber, said he’s accepted four deposits in Bitcoin via Coinbase so far, and that the landlords didn’t mind as long as the units got rented.

Weber said it’s particularly practical for foreigners renting in New York City and helps them avoid the usual fees and wait time associated with transfers from financial institutions in their home countries. “If they have any cryptocurrency, they can immediately make a deposit,” Weber said.

The brokerage head chose to accept Bitcoin to provide clients with as many options as possible, essentially to stand out from the competition. “I wanted to be the first,” said Weber, who expects cryptocurrencies, like credit cards, to one day be accepted as a standard form of payment.

Shaoul said he will continue to expand the use of crypto on real estate deals in the coming months. As of now, the developer accepts only Bitcoin, though he plans to add two additional coins sometime this year. “This is the future,” said Shaoul, adding that he expects to close on his first commercial deal in Bitcoin soon.

“Evolving science”

Not surprisingly, those jumping on the bandwagon are almost all investors in or proponents of cryptocurrency.

For the average buyer or seller, cryptocurrencies remain highly impractical, the attorney Sedgh noted. “The way the market is set up right now, it’s not ready to become the norm for the everyday buyer and seller of real estate,” he said.

The biggest hurdle is the bureaucracy tied to real estate deals, according to sources. In order to transact in Bitcoin, all the parties to the property deal need to be on board, and without the infrastructure in place, most institutions prefer to avoid the hassle.

The most oft-cited concern is volatility, especially if there’s a delay between when the contract is signed and when the deal closes. In the past year, the price of Bitcoin has wildly spiked and crashed, hurtling from $2,000 to $20,000 and back down to $6,000 in a matter of months. Since falling to the low point in February, the price has hovered around $8,000 — give or take several thousand on some days. Other cryptocurrencies, such as Ethereum and Litecoin, have shown similar hair-raising volatility.

For that reason, deals are generally pegged to fiat currency, which eliminates the volatility problem for everyone but the buyer. To date, there have been no crypto-to-crypto transactions, in which the asset is valued and exchanged only in digital currency, in New York. That’s due to the volatility, sources say, and also because it would be incredibly rare for all parties in a transaction — which can include lawyers, brokers and title insurers — to want to walk away with Bitcoin in their wallets.

A third challenge is that condo boards and banks don’t recognize cryptocurrencies as assets.

“If it’s a buyer looking to buy with all Bitcoin, and they’re applying for a mortgage, their bank is not going to look at their Coinbase account for their approval,” said Sedgh. “You still need to show verifiable income and assets, such as bank statements and income in U.S. dollars to be approved for their financing.”

Dan Conn, the CEO of Christie’s International Real Estate, said he wouldn’t feel comfortable if a buyer came in requesting to transact in Bitcoin and had no evidence or history of safe assets with transparent origins. In general, Conn — a former investment banker — said he didn’t see the benefit of Bitcoin in real estate transactions.

“I think it’s bananas,” he said, about transacting in such a volatile currency.

But Hansen argued that luxury assets are the perfect place to use Bitcoin because they’re one-off purchases, often in cash, and intended to store value. He said it can take roughly 15 minutes for a Bitcoin transaction to clear. That, he said, makes it useless for buying coffee, but far more efficient than a typical wire transfer, which can take several days if it’s from a different country.

In one all-crypto deal in Massachusetts, the buyer and seller agreed that if the price of Bitcoin fell below a certain amount, they would renegotiate. The broker on that deal took his fee in Bitcoin, then immediately transferred it to dollars.

Hansen hasn’t hammered out exactly how he’d make it work for the 51st Street property, but said he would likely charge a premium to transact in Bitcoin, in order to account for the costs involved in liquidating the coins (fees are notoriously high), not as a hedge against volatility. He expects to liquidate enough money to repay the mortgage.

“This is very much an evolving science,” Hansen said. “It’s not like anyone has cornered the market on how this should work.”

Digital dark side

For those whose only knowledge of crypto is watching the fictional hedge fund manager Bobby Axelrod use it to make shady payments in “Billions,” you are not alone.

And there are very real concerns about cryptocurrency being used for illegitimate reasons.

Antonio del Rosario, a broker with Brown Harris Stevens, is currently marketing a studio at 88 Greenwich Street that accepts Bitcoin, but his post about the listing got rejected from Facebook, Instagram and LinkedIn, until he removed the word “cryptocurrency.” “We do not allow ads that promote financial products and services that are frequently associated with misleading or deceptive promotional practices,” read the notification Rosario received from Facebook, which included “initial coin offerings and cryptocurrency” in the policy.

Under political pressure, Facebook and other social media sites implemented new policies earlier this year to combat fraudulent uses of crypto.

Despite that hiccup, Rosario is bullish on the future of Bitcoin. He said that more than 50 percent of the inquiries for his listing at 88 Greenwich, which accepted Bitcoin, were about the cryptocurrency, and many asked for information on how the transaction would work. “We’re getting offers in cryptocurrency, not in dollars,” he said.

Rosario says that New York has been particularly slow to adapt to the changes wrought by blockchain technology. “What can be tough with New York is that there’s too many old ways of doing things here,” he said.

Boris Sharapan Fabrikant, a broker at Triplemint, said he’s also received interest from clients, and plans to advertise that one of his sellers is accepting Bitcoin.

“A lot of it was just to create buzz,” he said. “I’ve seen brokers doing it. It’s a great way of getting your apartment attention.”

Shaoul said accepting additional cryptocurrencies is part of his firm’s “marketing platform.” And in today’s residential market, anything that gets eyeballs on a project — even a marketing ploy — can be counted as a win.

Part of Hansen’s motivation for accepting cryptocurrencies is to widen the pool of potential buyers. “If it helps get [more people] in to look at the property, then I’m all for it,” he said. The option to buy with Bitcoin might be attractive to international buyers if they’re not required to pay taxes when exchanging the digital coins for real estate, the seller noted.

So far, Hansen said, the listing has garnered attention from a financial adviser in Luxembourg and a man purporting to be a Syrian refugee looking for a place to park his cash, among others. Those inquiries came through the Bitcoin listing site, which has brought in a roughly equal number of inquiries as the regular channels, said Scott Stewart, the broker for the property.

“It’s a way to reach the uber-wealthy, some of which are above board and some of which are black-market people,” Stewart added.

The Syrian with cash to burn is out, according to the broker, but the Luxembourgian financier is legitimate.

And while Hansen said he’s indifferent to whether he actually sells in Bitcoin, he remains bullish on the value of digital currencies.

“Eight years ago, this didn’t exist,” he said about the cryptocurrency market, “and now it’s worth $400 billion.”