I can’t really address the first part about selling the house on paper and not transferring the NFT.

I figure this thing would have cellular access as well as Wi-Fi. So if your Wi-Fi was to go down, then the cell network would be used instead. And those generally use different ISPs for fiber and often get restored first or dont go down at all since they are commercial contracts. In the event of a total internet cut, it is well known that a house does not change ownership very often, so the lock could be programmed to not accept any new keys for a period like a day. The lock would accept only the old key during that time like a cooldown period

Right, but all the lock is doing is checking whether you own the NFT or not. If your house was in NFT, people could see that you bought a house, but not where it was as long as it was generic like house #40000

Besides the obvious of your door lock needing to be connected to the internet, and that could be a problem, what else do you see as being an issue with using it for door keys?

I do see potential use for them, but not in the way they are currently being used. I could see uses like door keys, tickets, memberships, etc being of practical value, but not stupid little pictures.

As crazy as it sounds, some people do.