What are Water Rights?
Water rights are a type of property right; specifically, it is the right of a land owner to use water from sources like streams, ponds, rivers, or groundwater. Determining who owns water rights is country and state-specific.
Also, some area treat ground water and surface water in the same manner while others in different areas us different principles and policies for each. Water rights are either classified as use-based or land-based rights.
An owner of the water rights that run with a piece of land can often sell those rights to another land owner or another person altogether; it is not unlike selling an easement (such as the right to put a driveway to another parcel over your land) or mineral rights (such as giving a company the right to drill for oil on your land).
East vs. West
In the United States, there are two completely different systems for determining who owns water rights. Most of the eastern states use riparian water rights. With riparian rights, the land owner whose land touches the body of water (such as a river or pond) are allowed “reasonable use” of the water. They can’t divert the river and they can’t use so much of the water that they negatively impact other riparian owners.
In most of the western states, they use prior appropriation. Basically the one that used the water for some type of beneficial use first gets to continue using them (for farming, for instance), even if it is somewhat to the detriment of another land owner. One of the best books to help a non-lawyer understand prior appropriation is Western Water Rights and the U.S. Supreme Court by James Davenport. We highly recommend you read it.
These systems address surface water rights such as the right to use water in a lake or stream. Underground water rights come in a couple of forms as well. Under absolute ownership (or the rule of capture), you can drain as much water as you want from underneath your land, even if the aquifer you are draining extends under many other parcels. The more common practice is the American rule which allows you to drain as much as you can as long as you are not wasting the water or have some other negative motive.
Water rights get litigated heavily. Several concepts come into play such as common law, public trust doctrine, and eminent domain (because the government forbids taking property from a land owner without compensation).
California has a much more complex system that is sort of a hybrid between riparian and prior appropriation. If you own a piece of property that has water rights, you can sell the water rights to someone else. Many of the sales take place with one party or their representative (possibly a real estate agent or landman) contacting another party after looking up ownership records.
The most notable water rights deal out there is billionaire T. Boone Pickens selling his water rights of land he owns over the Ogallala Aquifer in West Texas for $103 million to 11 nearby cities including Amarillo and Lubbock. He sold the right to drain 65 billion gallons of water a year from underneath his land. What he did should form as a template for what someone else can do to make money selling water rights.
4-Step Process to Make Money with Water Rights
1. Buy a large tract of rural land in Texas with underground water. Surface water law is much more complex and at the end of the day, your potential water rights ownership is only the stream or river directly touching your parcel. The amount of underground water could be many times larger, and with the rule of capture in Texas (and almost nowhere else), you could potentially drill for water under your parcel, even though the water doesn’t stop at property lines and extends to other parcels. The land can be totally rural and have little value outside of its water. In fact, any real estate value outside of the water rights is probably a negative because it just raises the purchase price and your annual taxes.
2. Sit and wait. Wait for the demand for water to increase; that is about as sure a thing as death and taxes. You need to stay a step ahead of any neighboring parcel owners whose drilling for water might impact you. Water in an aquifer could care less about a property line. If anyone else starts drilling or indicates they will start, then you need to get out of hibernation mode and drill yourself or sell the water rights.
3. Negotiate a water right sale. The most common buyer is going to be local municipalities or water districts within 50 miles. However, you can always threaten to build a pipeline (enormously expensive) or truck the water to another jurisdiction to gain leverage.
4. Sell the water rights but keep the land. There may be other uses for the land like hunting or ranching. Also, this is Texas and the mineral rights could be worth as much as the water rights if you are lucky. Something like the Barnett Shale might be discovered in the future, or a known shale formation might be able to be tapped with future technologies.