Who doesn’t want to own an investment that provides short and long-term financial security with very little work? An investment that involves someone making an expensive capital investment while you don’t have to front any money at all? An investment that generates you a big check up front or continuing royalty checks that you simply need to go to the bank and deposit, with no other work required? Sounds great, doesn’t it?
What are mineral rights anyway, and how can you monetize them? Here’s everything you need to know.
What Are Mineral Rights?
The simple mineral rights definition is – The ownership rights to underground resources such as mineable rocks like salt and limestone, metals and ores, and fossil fuels like oil, coal, natural gas, etc. It’s important to state right off the bat that mineral rights are quite different from surface rights.
Surface rights give you – the owner – the right to use the land for commercial, agricultural, residential, and other surface-level purposes. Mineral rights, on the other hand, give you the right to exploit any natural resources you might find beneath the land surface.
How Do Mineral Rights Work?
The United States laws allow you to purchase and own land privately. That ownership gives you the right to develop and exploit that land in any way you deem fit, provided your activities are not in contravention of the law. This means you’re also entitled to any natural resources you find beneath the land surface.
Such freedoms are less common in other parts of the world. For instance, in the United Kingdom, mineral rights to gold, silver, gas, oil, and coal exclusively belong to the state, whether or not the natural resources in question were discovered on privately-owned land.
Since private entities and individuals in the US can own the mineral resources that lie beneath their land, they have the right to decide what to do with them. If your property sits on top of a subterranean oil reserve, for instance, you could decide to sell the rights to those minerals to a private corporation in exchange for a hefty up-front payment.
Alternatively, you could decide to sign a contract for on-going royalty payments and retain ownership of the rights in question. It’s entirely up to you to choose.
Keep in mind, sometimes you own land, but not the mineral rights. The mineral rights may have been reserved to someone else (such as the United States Government, a state, or a private company) someone in the chain of title before you purchased the land.
How Much Are Mineral Rights Worth?
The higher the current market value of the mineral in question is, the more money you’re likely to fetch in mineral rights. While it can be difficult to figure out how to calculate their precise value, there are certain techniques you can use to get a good ballpark estimate of what to expect.
The average prices of mineral rights per acre could range anywhere from $200 to $10,000+. The prices vary depending on the factors at play and the mineral in question. The prices of oil mineral rights, for instance, might be influenced by the:
- Number of wells that have been drilled
- Number of wells left to drill
- Current rate of production
- Existing production in the surrounding area
- Existing wells’ decline curve
- Existence and soundness of pipeline infrastructure
- Localized pricing for gas and oil
- Royalty rate
- Existence of active or expired permits
The list goes on.
The best thing to do would be to get a mineral rights appraisal professional to estimate the value of the rights in question. The other way would be to gauge the value of the existing offers you’ve received so far.
Keep in mind that no two rights buyers are the same. Some might give you a lowball offer, while others might send a teaser, only to lower the price when you get in touch with them. However, if you receive a substantial number of offers, these will give you a general idea of their current market value.
How Much Do Mineral Rights Sell For?
There’s no “average price” per acre when it comes to selling mineral rights. Even if your next-door neighbor’s property is sitting on top of the same resources, the price you get per acre may significantly differ from theirs.
Say, for instance, you purchased a property on a 25 percent lease. You discover an old vertical well on it that was shut in, in 1960. Your neighbor, on the other hand, has a 12.5 percent lease on their property. They already have five wells drilled that have been producing oil for several years now.
Even if your properties border each other, the average price for your mineral rights per acre could be worth well over $10,000 while that of your neighbor might fetch no more than $1,000 for each acre. The reason being, you have a 25 percent lease and an active rig, while your neighbor’s property might not have much oil left in it, which might explain the lowball offer.
Mineral Rights Ownership Phases
Estimating the value of your mineral rights ultimately depends on what ownership phase your property is in. There are generally three phases to consider.
Phase 1: Non-Leased Mineral Rights
For properties that don’t generate any royalty income and have no active lease, the mineral rights are normally valued at under $1,000 per acre. The average mineral rights price for non-leased, non-producing properties is between $0 and $250 on average unless you’re looking at a significant amount of acreage – somewhere in the realm of 250+ acres.
Phase 2: Leased Mineral Rights
For properties that generate royalty income, but don’t have an active lease agreement, the value of mineral rights is usually two or three times the value of the lease bonus. For instance, if a property owner leased mineral rights for $3,000 per mineral acre, they can expect anywhere between $6,000 and $9,000 per acre.
The price at which you can sell leased mineral rights all boils down to the lease terms, royalty percentage, and how good (or bad) the deal you got was at the time of leasing.
Phase 3: Producing Mineral Rights
This applies to properties that generate royalty income and have producing mineral rights. To determine their precise value, there are two things you need to consider.
- Cash Flow Value: This is based on what the current royalty income of the property in question is
- Future Upside Value: This is based on the possibility of what might happen in the future, like a new well being drilled that might generate additional royalty income
Selling Mineral Rights
The goal of selling mineral rights shouldn’t be just to make money. You need to make sure you’re getting the maximum possible value for them.
Before selling, take a step back and explore your options. Think about why you want to sell. For some wealthy individuals, it might make sense for them to hold on to their mineral rights.
However, there are several reasons why selling them might make more sense financially. Below are some of them.
This is often the number one reason why most people sell their mineral rights. Let’s say you inherited rights worth $100,000. If you sold them for the same price, you might only have to pay roughly $5,250 in taxes, meaning you would pocket $94,750.
If, on the other hand, you decided to collect royalty income worth $100,000 instead, you could end up paying more than $30,000 in taxes. Not to mention the fact that it would take several years to collect that amount in royalties.
If you inherit mineral rights, then it makes sense to sell them rather than keep collecting royalties on them.
As a rule of thumb, if more than 5 percent of your net worth is tied to mineral rights, consider selling a substantial portion of them and diversifying your investment portfolio. A great option would be to put some of that money in a total stock market index fund or ETF that pays out a dividend every quarter.
Owning real estate, stock, or any other asset gives you complete control over what happens to it. You can’t say the same for mineral rights.
If your property sits on a subterranean oil reserve, for instance, you don’t get to choose when (or if) the drilling starts. It is always in the best interest of a mineral rights owner that the drilling begins immediately.
Unfortunately, you don’t have a say on the matter, so it may make sense to sell your mineral rights, get the money, and invest it in something else altogether.
Price of Oil and Gas
Oil and gas prices are as volatile as they come. Not only do you not have a say over when the drilling occurs, but you also don’t get to decide the price of the oil and gas extracted from your land. The current market prices are what ultimately determine the amount you get in royalties.
Short Term Financial Obligations
If you recently lost your job, want to start a business, make a down payment on a home, or have any other short term financial need that requires a substantial amount of money, selling your mineral rights makes the most sense. It’s quick and gives you access to immediate cash.
How to Get the Best Value When Selling Your Mineral Rights
The secret to maximizing their value is – competition. You want hundreds of buyers competing to pay you the highest possible price for your rights.
While you might believe that selling mineral rights on your own is a good idea, the reality is, you don’t have access to a large enough network of prospective buyers to get the best possible deal. You’ll almost always end up selling below their market value since no two buyers evaluate mineral rights the same way.
What you may not realize is there’s always a buyer out there willing to make a better offer and a much higher one at that. The more buyers you have competing for your mineral rights, the higher their price will be. Listing at a credible mineral exchange would be your best bet to cast your net wider.
Buying Mineral Rights
On the flip side, you might be thinking about investing in mineral rights. Keep in mind, however, that it is a risky endeavor. You need to know what you’re doing.
The more knowledgeable you are or on the subject, the more likely you are to buy quality rights at a reasonable price that will pay off in the long run.
Factors to Consider When Buying Mineral Rights
First, you need to identify the specific type of rights you’re interested in acquiring. You could choose from royalty interest, non-participating or overriding royalty interest, working interest, or mineral interest. Each of them has its own unique set of pros and cons.
Next, you need to consider where to purchase the mineral rights. These are usually available at auctions, through negotiated sales, from brokers, directly from mineral owners, or even from tax sales.
You’ll also need to think about the lucrativeness of the minerals in question. It needs to make sense.
In the US, for instance, oil and gas reserves are abundant. States like Texas, Utah, Louisiana, Wyoming, California, Colorado, North Dakota, New Mexico, Alaska, and Oklahoma hold roughly 80 percent of the country’s total oil and gas reserves. Lithium, which is used in making batteries for electronics, is yet another lucrative mineral that would be worth investing in.
Do your due diligence and establish whether the locale is a known deposit reserve of the mineral in question.
Finally, familiarize yourself with the mining laws in that particular state. Most states have similar rules but may have minor variations that may or may not work in your favor when investing in mineral rights. Always make sure you understand the complexities involved.
How to Make Money From Buying Mineral Rights
To make money by purchasing rights, you first need to weigh the pros and cons of buying versus leasing them. If you decide to go the leasing route, you’ll need to start drilling way ahead of time to maximize the potential benefits of extracting the minerals before the lease is up. Failure to do this means your mineral rights may end up reverting to the property owner before you derive the maximum possible income from them.
Alternatively, you could opt to purchase mineral rights for speculation. It allows you to reap the full range of benefits when you resell them to another company that will do the actual extraction.
If you had to choose between leasing and buying mineral rights, signing a lease would be a better and more cost-effective option. It gives you the chance to gauge how lucrative the property is before going all-in and spending a ton of money to buy it.
It’s important to mention that owning the surface rights to a property isn’t the same thing as owning the mineral rights. These are two entirely different entities that can be sold together or separately.
How to Buy Mineral Rights
The process may vary depending on where you buy them. Once the seller accepts the offer you make, you both have to agree on specific terms some of which include, the terms of the sale, the price of the rights, the access method to the property, the specific minerals you wish to extract, the steps you intend to take for damage control, the mining methods to be used, and so forth.
It’s always a good idea to get an attorney involved to break down the intricacies of the agreement before you finalize the deal and sign on the dotted line. Once that’s ironed out, the process of transferring ownership, and getting into pay status with the respective operator is pretty straightforward from thereon.
How to Sell Mineral Rights
If you’re a mineral rights owner looking to monetize your interests, you could either choose to sell them or lease them for a specific duration. Here are some of the available ways through which you can monetize your mineral rights:
- Auction – You could use a reputable auction platform to sell your mineral rights to the highest bidder
- Broker – You could use a broker to sell your interests at the best possible price to the buyers they identify
- Mineral rights exchange – You could use a mineral listing platform that hosts thousands of potential buyers and go with the highest offer you get
- Oil and gas companies – You could enter into a lease agreement with them or sell your mineral rights to them entirely
- Outright sale – You could choose to sell your mineral rights, which may or may not include the surface rights to the property, to an individual or private entity
Whether you’re buying them or selling them, mineral rights are a lucrative investment – there’s no question about that. You just need to be strategic about your decision, get the best possible value for them, and make sure it makes financial sense in the long run. Use the information provided in this guide to help you get the best deal you possibly can.
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