Selling Mineral Rights – Important Considerations!
October 4, 2016
Owners of mineral rights are frequently approached by investors about selling or leasing their oil rights or gas rights. Doing so can be lucrative for those owners, as long as there is a good understanding of the business and the right deal is finalized. How should anyone selling mineral rights know they are getting a good deal? Owners should consider the following important ideas to ensure their rights are being protected so they can sign a contract in confidence.
Know the Value of Mineral Rights
Above all and before making any deals on the sale of mineral rights, owners should know the value of the oil rights and gas rights that they are selling. It is impossible to negotiate fairly without mineral rights owners understanding the value of their mineral rights and how negotiations will affect their return. A party interested in buying or leasing from someone willing to sell mineral rights obviously knows what those minerals are worth.
Before negotiating, it is definitely advantageous for owners to hire a landman or geologist to analyze and value their right. This will ensure that owners have a strong bargaining point and can reduce the possibility of their right being undervalued by an investor.
What Is Better - Leasing or Selling?
After determining the value of a mineral right, owners should then consider whether it will be more profitable to sell or lease gas or oil royalties. When selling mineral rights, owners are paid a lump sum up front according to the length of the contract and other contributing factors. On the other hand, a lease will pay royalties throughout the length of the contract.
One determination may be more advantageous than the other, depending on the size and value of the deposit, current demand and market conditions, and what is typical for other transactions in the area. When a buyer offers a lump sum up front in lieu of royalties, this could indicate that the buyer thinks a deposit is very valuable and is seeking to retain as much profit as possible.
Consider What Will Happen on the Surface
Texas law on the sale of mineral rights leaves mineral owners in control over what happens on the surface. What this means is that owners of oil rights or gas rights who sell to another party have no control over where drilling takes place. If the seller also owns the surface estate, this could be problematic, especially if there are plans to use the land for something else or it is already in use.
Being Paid Now vs. Later
Another important factor that owners of oil rights must keep in mind is that payment will come at different times, depending on the arrangement. When selling mineral rights, a lump sum can usually be expected at the time of the agreement. On the other hand, leases will not generate royalties until land becomes productive. This could take years, as investors may not drill right away even after leasing mineral rights from the owner. In that time, the worth of a mineral estate can rise or fall. This is an important consideration to make when weighing whether to sell or lease a mineral estate.
All things considered, anyone interested in leasing or selling mineral rights must do their research to ensure they are getting the fairest deal possible. Most of the effort and risk is borne by the company looking to buy or lease; however, owners of mineral rights still have work to do. By knowing the value of their mineral estate and how different options like selling or leasing will affect the deal, those owning mineral rights will be able to make the most informed decisions!
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