One Major Difference Between Domain Names and Real Estate

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People regularly compare domain names to real estate, and I think it is generally a good comparison. When a domain name owner is negotiating the sale of a domain name to someone unfamiliar with this “virtual real estate,” it can be helpful to use physical real estate as a comparable asset class.

There are several important differences (like tax treatment and asset class among others) between domain names and real estate, but I want to share one major difference people probably don’t think about – the branding aspect.

I am evaluating a couple of major lease and lease to own offers on domain names my company owns. One issue with a deal that involves a future payment where a buyer or lessor is allowed to use the domain name in the interim is the goodwill of the domain name can potentially be harmed. If the company goes out of business, is a scammer or spammer, or if something bad happens to the company using the domain name, the domain name brand could be irreparably harmed.

Allow me to illustrate with an example:

Let’s say you own a property in a major city and you lease it to a restaurant. If it turns out that people got very sick eating at the restaurant and it closed down, the real estate value is not really harmed. You could lease the space to a retail store or even another restaurant, and people most likely will not associate the closed down restaurant with the new restaurant or retail shop. The address is the same but the restaurant and restaurant name are totally different. A domain name, on the other hand, is the address and the brand. If a domain name is used in a manner that harms the brand, it could be very difficult for someone else to use the name in a subsequent manner and shed itself of the negative goodwill created by the former user.

When considering a lease, lease to own, lease with a buy option, or some other type of deal where the buyer isn’t going to pay for the domain name upfront, the domain owner needs to understand that the domain name brand could be harmed for future use. I am sure there are ways to contractually protect the business, but even if there is recourse in the contract, the domain name could be tarnished for a future user.

Domain names compare well to real estate, but this is one major difference that should be considered.

10 COMMENTS

  1. Isn’t it the same if the tenant contaminates the land environmentally while under the lease agreement? Without reclamation, the land is forever tainted, just as you contend for a domain name.

    • Many prime pieces of real estate in big cities are former gas stations which have had underground gas tank leaks contaminating the properties. Cleaning up that contamination is a big business.

  2. One thing that I learned on one domain name I had leased is that bad linking strategies can damage a name. I believe what occurred is that they were likely using private blog networks (PBNs)…. my best guess. The domain I leased (with rights to buy) was ranking on the 1st page in the top 3 spots consistently. One day I checked & the site they created more or less disappeared from being ranked on Google. I however was lucky as they had decided prior to that to pay off the total remaining balance before that occurred.

    Here is some wording I had put in a future lease on another domain name. I’d likely add some additional/different wording now that I look at it but you get the idea –

    The Renter acknowledges and agrees that Owner may terminate this Agreement at any time, immediately following the issuance of written notice to the Renter, if the use of the Domain Name or any web pages served thereunder, violates any law or is not used for purposes involving “whatever category” related services unless agreed to do by the owner. The Renter agrees not to utilize any backlink Search Engine Optimization strategy which may permanently damage search engine rankings.

  3. As I have pointed out before, analogies by definition are not perfect, otherwise they would not be analogies.

    The “real estate” analogy is one of my favorites and is obviously very useful, but it has such limitations. It seems too often people get too carried away in not acknowledging these realities.

    On thing I have thought about within the last year or so regarding the real estate analogy as it is used in the industry relates to how you properly evaluate or “appraise” (gag /) a domain name. It seems that “real estate analogy” thinking may actually tend to lead people to evaluate domains improperly and often well below what they are really worth, to the detriment of oneself and everyone concerned (except of course to buyers and predators looking to scoop up domains as cheaply as possible).

    So here is the bottom line, within the conceptual framework of the analogy:

    ย• In my observation, too often people tend to think of the analogy in terms of “residential real estate.” That’s not necessarily always so bad if you consider the existence of famous “mega-homes” and mansions. However…

    ย• The proper way to understand domain names within the framework of the analogy is to understand them to be what they truly “are”:

    Commercial real estate

    That changes everything – most especially how one is to properly and reasonably evaluate the true, plain and reasonable worth of a domain. (Unless of course you want to quibble about the “imputed” potential rental value of residential real estate, but I’m not open for business for that kind of quibbling today. ๐Ÿ˜‰ )

    Once you firmly realize that domain names are “commercial real estate” instead of “residential real estate,” then you can see more clearly and soberly how much each individual domain is really worth. I.e., what can be done and earned with it, etc. And it can be really eye opening. And that of course is also why I have a number of times mentioned a nice long three word .com worth at least 9 figures before, but of course it’s still in my best interests not to call attention to it.

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