For most of modern history, people have had few options for conducting financial transactions. In 2009, that all changed when the concept of Bitcoin was introduced to the general public. Bitcoin was the first type of cryptocurrency, a virtual currency that can be used in transactions outside the control of any central bank or government.
It is tracked on a blockchain, a system of recording transactions across multiple computers run by various individuals, making it extremely difficult to hack or cheat. Thus, Bitcoin and other forms of cryptocurrency can be bought, sold, and used as a currency without the regulations of any third party.
As Bitcoin has become more mainstream to own and trade in recent years, it has gained significant real-world value. Investors have recently found it possible to make more transactions with Bitcoin and cryptocurrency holdings in numerous fields, including real estate. Current estimates are that more than 10% of prospective home buyers use cryptocurrency to purchase homes. In economic terms, this development cannot be overstated.
Anyone interested in using Bitcoin to buy real estate must be educated, organized, and prepared. Cryptocurrency may present unique barriers in the homebuying process. To that end, here are six steps to use Bitcoin to buy a house.
Table of Contents:
STEP 1: DECIDE ON THE METHOD OF USING BITCOIN TO BUY A HOUSE
There are multiple ways that Bitcoin investors can use their holdings to purchase real estate. The first step is deciding which method will work best.
A. Converting Bitcoin to Cash
The most traditional way to use Bitcoin value to make a large purchase is to liquidate the asset and turn it into traditional cash. Investors can sell as much or as little of their cryptocurrency portfolio as necessary to raise the money needed for a down payment or a complete house purchase.
Just be sure to convert the assets well before purchasing, at least a few months. Sudden large deposits made too close to a loan application can, at best, require loads more paperwork and, at worst, a complete rejection of the loan.
B. Using Bitcoin as Collateral for a Mortgage Loan
Some lenders will allow crypto holdings to serve as collateral for investors who wish to keep their Bitcoin but tap into its value. There are two types of loans in this area. Centralized Finance loans are stipulated upon the lender holding and controlling the borrower’s Bitcoin for the duration of the loan term. The borrower will get the asset back once they make payments and pay off the loan’s balance.
Decentralized Finance loans allow the borrower to retain control over their Bitcoin, but the interest rates tend to be higher. In either case, the lender will possess the cryptocurrency if the borrower defaults on the loan.
C. Purchasing a House Directly from the Seller with Bitcoin
A direct purchase is the simplest way to buy a property with Bitcoin. So long as a seller is willing to accept crypto as payment, an agreement and a transaction can be made. The process of trading Bitcoin also streamlines the transaction. It makes it possible to complete it within a day or less. Another advantage here is if a seller values Bitcoin, the buyer may get a better deal on the home.
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STEP 2: PLAN AHEAD… WAY AHEAD
The importance of planning your Bitcoin transactions ahead of time cannot be overstated. This is especially true if you have chosen to convert your holdings into cash for a down payment. In this case, you should know how much money you’ll need months in advance and liquidate just that amount of Bitcoin.
There are multiple reasons for doing this. First, any mortgage lender that sees a sudden recent large deposit will require the borrower to go through a more extensive paperwork process and possibly revoke approval of a loan at worst. Converting the crypto into cash as early as possible can help to avoid this situation.
Even if you plan on purchasing your house through one of the other methods, it’s always good to have a detailed plan ready to go. You’ll want to have a backup plan if there are setbacks in any parts of the process, like issues in market volatility or vendors who don’t accept Bitcoin as payment.
STEP 3: ENSURE BITCOIN IS ACCEPTABLE TO ALL RELEVANT PARTIES
Suppose the plan is to rely entirely on Bitcoin holdings to complete the process. In that case, it is essential to vet all professionals involved to ensure that it will be an acceptable form of payment. This could mean finding a realtor who will accept Bitcoin for services, a lawyer who will do the same, or even a private home inspector interested in gaining some stake. Otherwise, it may become necessary to dig into traditional savings or incur monthly expenses that were not accounted for during the planning process.
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STEP 4: TRACK THE CHANGES IN THE MARKET CLOSELY
Bitcoin and other forms of cryptocurrency are highly volatile. Their value is based on several factors that are still unpredictable and unconventional. Since searching for a home and going through the purchasing process can take months, it is crucial to know how Bitcoin’s value changes in real-time.
This is especially important for investors who have chosen to use their Bitcoin as collateral for a loan. With certain crypto loans, the borrower may need to add more Bitcoin to ensure that the collateral matches the borrowed value. In other cases, a purchase may fall through due to a constantly fluctuating market. The volatility makes cryptocurrency so exciting, but it also means it’s important to follow and track those changes.
STEP 5: DOCUMENT, DOCUMENT, and DOCUMENT MORE
Any significant financial transaction requires careful documentation, and buying a house with Bitcoin is no different. If going through a mortgage lender, they will want to verify that all transactions are legal and legitimate.
If dealing directly with a seller, both parties want to protect themselves with the correct information and contracts. Finally, the IRS considers Bitcoin and other forms of cryptocurrency property subject to capital gains taxes.
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STEP 6: KEEP TRACK OF CHANGES AFTER THE SALE
Property values and crypto values will continue to rise and fall after you’ve purchased your home. All stakeholders must track the worth of these assets for legal purposes and for reporting gains to the IRS during tax season.
PROS AND CONS OF USING BITCOIN FOR BUYING A HOUSE
a) Pro: Rapid Transactions
The transfer of cryptocurrency can happen extremely quickly, especially when transferring Bitcoin directly to a seller. The entire process can take less than a day. Anyone who has gone through the traditional home buying process will know how shocking that is.
Additionally, as Bitcoin continues to become more mainstream, more banks and mortgage lenders may start to accept these transactions, eliminating the need for piles of paperwork typically required to purchase a house.
b) Pro: Turning an Unstable Asset into a Stable One
Some investors may like the idea of moving on from the constant changes in Bitcoin’s value for the relatively stable and slower-to-change value of a piece of real estate. This can provide more peace of mind for the owner. If, after the purchase, the investor still holds more Bitcoin, then the property represents a diversification of investments, which is also a positive.
c) Pro: Possible Better Deals
Better deals are probably only available if the person selling the house values cryptocurrency. These sellers may be willing to come down on the price for the chance to add Bitcoin to their digital holdings. It certainly doesn’t hurt in the negotiation process.
d) Con: Fewer Legal Protections and Higher Taxes
Until more federal governments relent and accept Bitcoin as an acceptable currency, there may be fewer legal protections on these transactions, possibly leaving more doors for litigation. Additionally, more transfers and liquidation of assets mean higher tax payments.
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e) Con: Finding an Acceptable Agreement may be more Difficult
Most property transactions still take place in the traditional way, meaning many home sellers, realtors, and other vendors will not trust the process with Bitcoin. This could mean more logistical hurdles or extra work finding vendors who will be agreeable to the arrangement.
f) Con: Market Volatility
As we’ve mentioned, cryptocurrency is constantly in flux, which at the least, will require a lot more attention to detail and much more awareness of the current market. When the market is particularly active, it could sometimes mean day-to-day or even hour-to-hour dramatic changes. A digital wallet that looks like it has plenty to cover a down payment one week may not have enough the following week. It’s always good for investors to do their due diligence.
Bitcoin is an exciting form of cryptocurrency that holds incredible potential but comes with many unknowns. As more and more people have joined the crypto craze in recent years, Bitcoin holders have been able to use their investments to purchase more assets, such as houses, apartments, or condos.
These new real estate developments are undoubtedly promising. Still, anyone wishing to enter this process must be careful and ensure that they take all the proper steps for a successful, stress-free transaction.
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