Mineral Rights – Is it worth the fight?

As of lately, in the transactions where I represent a buyer, I’ve encountered sellers that have put up a HUGE fight over retaining mineral rights; even to the point of killing a hole deal over mineral rights that have yielded ZERO income over the last few years. What gives?

Here’s a scenario:

Seller purchased a home 8 years ago. Seller was approached by a company that wanted to purchase the rights drill and keep minerals (gas, oil, etc.) that are found at the property. The seller leased the mineral rights to this company for 8 years. (Keep in mind the company wasn’t 100% sure that there were minerals underground but had some inclination that there may be).  For the first three years the seller received royalties of $1200 per year. After that, the seller received $0 per year. Now, the seller decides to list the property but wants to retain these mineral rights.

Why would a seller want to retain these mineral rights? Wouldn’t they just want to sell the property and move on? You ask.

Whether they are receiving regular royalties or haven’t received any royalties, some sellers would like to continue to receive these funds. In a case where the seller hasn’t received anything over the last few years, they hold on with some hope that they may receive royalties in the future.

First, let’s put these royalties or the potential of these royalties in perspective. In the scenario above, the royalties ranged from $1100 to $1200 per year for about two year (however, after the 2nd year the property owner stopped receiving royalties). If we break that down it’s a total of $91-100 per month; or about half a days pay for a person that earns $75,000 per year. Do you see what I’m getting at?

If a seller wants to keep mineral rights this could be a huge issue for potential buyers. In some buyers mind if you sell a house, sell it and move on. Other buyers may not care but most do.

So is it worth killing a deal? In my opinion the answer to this question is going to depend on one’s overall goals. When you really think about it, if this is a point of contention between buyer and seller, the seller is really fighting for pennies. Plus, any royalties received are taxed at a higher rate. This would mean that if a seller kept the mineral rights, he/she would not only be taxed on the capital gain from the sale (of course this is going to depend on the seller’s profession and the nature of the transaction) but he/she will also be taxed at a later date on all royalties (if any) received.

I encourage sellers to do their research, know their goals for the transaction and move forward carefully so that you don’t lose out on a sale fighting for a small amount (and sometimes nonexistent) royalties.

 

Visit http://www.tad.org/webpages/mineralfaq.cfm for more information.