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Getting It Right: Mineral, Oil, and Property Rights

When you buy land, you might assume that your property rights give you ownership of everything below your feet. That’s not always the case, though. While you have surface rights, someone else may have mineral rights to its metals, oil, natural gas, and other commodities.

If you currently own land, then you may need to have someone research its previous ownership rights to determine whether you own the mineral rights or not. Ideally, though, you will know your surface rights and mineral rights before you buy land.

Owning Land Doesn’t Always Mean You Own What is in the Land

When surface and mineral rights get separated, you need to know it affects your property and ownership.

Surface Property Rights

Surface rights only apply to the surface of the land. When you purchase a piece of property, you always get surface rights for the plot of land. Surface rights do not apply to anything below the surface of the property.

Mineral and Oil Rights

Mineral rights apply to ownership of anything below a property’s surface. It often refers to more materials than minerals like copper, gold, and silver. It can also refer to oil and gas rights.

When someone owns mineral rights, they get to access and harvest commodities below the land’s surface. Drilling, mining, and other harvesting options often disrupt the surface. That may not seem fair to the person who buys property. Still, the owner of mineral rights can, within reason, make changes to the surface while accessing sub-surface minerals.

In some cases, companies can access commodities without disturbing the surface. For example, a company may use horizontal drilling to extract oil and gas from the land.

property rights

Leasing and Selling Mineral Rights on Your Land

It’s possible to earn money by leasing or selling your land’s mineral rights. In 2013, landowners made about $22 billion from their mineral rights.

When selling mineral rights, you give someone or a company absolute ownership of the commodities in your land. Unless you have the opportunity to repurchase the rights, your property rights will never include ownership of oil, coal, and natural gas. Depending on the terms of your sale, you may get a lump sum from the buyer or receive a percentage of the money earned when the owner sells the oil, natural gas, or other commodity.

Some people assume that leasing their mineral rights gives them more advantages than selling the rights. The benefits and disadvantages depend on the terms that you and the other party reach.

After you lease mineral rights, the new owner may extract everything of value. If that happens, then you may lose future opportunities to make money from the mineral rights. Leasing can also mean that you don’t get any money unless the new owner finds and makes money from commodities in your land.

By leasing, you get your mineral rights back after a determined amount of time. You also run the risk of making less money and losing the opportunity to earn money from the land in the future.

Things to consider before selling or leasing mineral rights include:

  • How it will affect your taxes.
  • How accessing the minerals, oil, or natural gas will affect your land.
  • Whether removing the commodities will make your land’s surface sink.
  • Whether drilling or digging will affect wildlife or water near your property.
  • Clauses that define things like where drilling can occur and who will pay to repair any damage caused to the land’s surface.

Before you agree to lease or sell rights, make sure to work with a qualified land consultant in your market who can refer you to a lawyer with plenty of experience in these areas. You will need an expert to explain the details and help guide your decision.

Ideally, You Should Know Your Property Rights Before You Buy Land

When you buy land, earlier property rights agreements still apply. If a previous owner sold the mineral rights, you are stuck with the conditions of that deal.

You can learn more about your rights before buying property by performing a title search or Mineral Rights Search. Plenty of title companies offer services that will help you understand your property rights.

It’s important to remember that title searches don’t always find all of the information relevant to your land. Some experts recommend assuming that you don’t own mineral rights when you buy property. If anyone has sold the rights in the past, then you will not own the mineral, oil, gas, and other commodities beneath your feet. When land gets sold to dozens or even hundreds of different people, it’s easy to miss an instance when one of those owners sold the rights.

If you want to buy a piece of land, start by finding a land consultant in your area who can give you accurate information about surface and mineral rights in your state. The rules in one area aren’t always the same as those in other places.

Hidden Talent: Property Value from Untapped Sources

Everyone has a hidden talent. For some, it is a performance skill such as singing or playing an instrument. For others, it’s a marketable skill like welding, baking, or artistry. And for many, it’s something simple but impressive – magic tricks, stunts, or the ability to cram 23 marshmallows into your mouth without choking. Whatever your particular talent, those who are meeting you for the first time can’t see that talent on the surface. You must spend time with someone and get to know them before unlocking what’s inside (People don’t cram marshmallows in their mouth for strangers). But these talents make people fun far beyond simple socialization. They make people unique and interesting.

Land is no different. And while I have never seen land sing or bake, I have seen many pieces of land with their own hidden talents, that is, attributes that make for hidden value sources for owners and sellers. Finding and taking advantage of these hidden talents can provide higher cash flow, a higher selling price, or even intrinsic benefits to landowners and sellers alike. Here are just a few examples of places to look for, and hopefully find, hidden value in you or your client’s property.

1. Mineral Rights

Oftentimes, people can’t see beyond, well, what they can see. What is contained below the surface is sometimes the most valuable part of the property. Mineral rights can be very lucrative depending on location or resource to be mined. This may be a value a buyer wants to tap right away or at some point in the future after an alternative use. For example, here in Florida there are pieces of land that are used for cattle grazing and then later for mining of phosphate. Still later, some of the phosphate land is reclaimed for reservoirs or even single-family homes. In a unique case, there is even a luxury golf course build on an old phosphate mine near Tampa (checkout streamsongresort.com. This may be one of the best examples of hidden value I’ve ever seen.) Mineral rights are tricky and investing in them somewhat speculative. But properly considered, their value is not to be dismissed. For a better understanding of mineral rights, try the RLI course on the subject.

2. Conservation Easements

This one gets a lot of debate. Some people would argue that this isn’t hidden value, as putting a conservation on your land restricts the use, therefore devaluing it. And while I don’t disagree that selling prices for encumbered land are necessarily lower than their unencumbered counterparts, the real question lies in property use. I’ve seen cattleman pursue easements that remove their development rights – but only on land their family has been running cattle on for 100 years that they would never think of selling. These easements include what are called “compatible use agreements” which allow them to continue running cattle at a reasonable volume. Money in their pockets, they continue to operate as they always have. It is important to understand not only your rights but also your obligations as the owner of easement land. But if those line up, the opportunity could be an attractive one.

3. Mulch

This is definitely a much smaller scale example but still worth mentioning. Do you have an area of trees on your property that you think is worthless? Hire someone to clear those trees and turn them into mulch. I have personally had clients who have collected thousands of dollars from just few acres of pine or cypress. You don’t have to have a section full of 15-year-old pines to realize value from trees. This is certainly not a good retirement plan. But for smaller areas with no real merchantable timber, mulching is an excellent option that will provide some income.

4. Leasing – Hunting, fishing, camping, ATV riding

Again, not a lottery ticket here, but you don’t always need thousands of acres to provide a recreational area for someone. I’ve seen people lease as little as 10 acres for people to ride ATVs or dirt bikes on and as little as 100 acres for people to hunt on. Usually, these are vacant land pieces within 30 min or so of a city for people to just enjoy the outdoors. Sometimes referred to as “play land”, pieces like these provide the city-dwellers an opportunity to get away, get dirty, and enjoy some fresh air. Some landowners even provide limited use of their land free of charge to non-profit organizations. Not only is this great community involvement, but could also provide an opportunity to deduct the fair market value of that use for tax purposes (Not offering tax advice. Consult your CPA J).

Whether your property can swish an over-the-shoulder 3-pointer or do a double back flip off the diving board, it’s got something valuable that isn’t obvious. Take some time to find that value for yourself or your client for maximum property benefit.

What? Oh, me?? I play the piano. Happy to bang out Don’t Stop Believin’ for you anytime.

This post is part of the 2018 Future Leaders Committee content generation initiative. The initiative is directed at further establishing RLI as “The Voice of Land” in the land real estate industry for land professionals and landowners. For more posts like this, click here.

mcdow, calebAbout the author: Caleb McDow is a land specialist and vice president with Crosby & Associates, Inc. in Winter Haven, FL, with a Master of Science in Real Estate (MSRE) and is a licensed private pilot and drone operator. McDow joined the institute in 2014 as a Military Transition Program (MTP) member.  He serves on the Institute’s Future Leaders Committee and regularly blogs on real estate issues. Caleb McDow can be reached at 352-665-6648 or caleb@crosbydirt.com

Breaking Down Mineral Rights

Mineral rights are so complex that most of the time, people would instead hire a lawyer to deal with them. The bad news is, there is a lot of truth in that statement. Mineral rights can be tied up in tricky deeds going back generations. The good news? We’ve collected the most commonly asked questions about mineral rights to help you get a better understanding of one of the most complex issues in the land industry.

Q: What exactly are mineral rights?

A: Mineral rights are the legal rights to the minerals in a property. Whoever owns a property’s mineral rights has full legal rights to mine for and profit from those minerals.

Q: What kind of minerals are included in the term “mineral rights“?

A: There are lots of minerals that you can make a profit off if you own mineral rights. These include oil/natural gas, coal, precious metals (gold/silver), non-precious or semi-precious metals (copper or iron), and specialty earth elements like uranium.

Q: What minerals do I NOT have access to?

A: This is where mineral rights can get tricky. Sand, gravel, limestone, and subsurface water are all not covered by most mineral rights. These elements are typically considered part of the surface area of a property. Whoever owns the surface rights also owns the rights to the sand and limestone.

There have been many legal battles over what counts as a mineral. Here are just a few examples. To keep your mineral rights out of the courtroom, be sure to be explicitly clear with whoever you are buying or selling your rights to.

Q: Are mineral rights profitable?

A: Yes, but not as profitable as you might think. Private mineral rights owners received an estimated $22 billion in 2013. The government also makes a pretty penny off of mineral rights. In 2016, the U.S. government received roughly $2 billion in mineral productions (which includes oil, gas, and coal) on federal land.

However, the growing number of legal battles between states and landowners over mineral rights is starting to rack up a hefty tab. In some cases, the price of the lawyers and time in court can drain more money than the mineral rights are worth.

If the minerals in your land are oil or coal, you are competing with solar and wind energy. The rise in renewable energy sources also has the potential to lower the value of the oil or coal in your land.

Q: What are the most common ways that mineral rights are held?

There are three common ways that mineral rights are held. The first and most common is a unified estate. In unified estates, the mineral and surface rights are held together, so whoever owns the deed to the property owns both mineral and surface rights. A severed or split estate means that the mineral ownership is sold separately from surface ownership. In this case, whoever owns the surface rights does not own the mineral rights. The last type of estate is fractional. As the name implies, fractional estate is when you receive a portion of the mineral rights. Fractional estates are often used for inheritances, so that each heir can split up the profits equally.

Q: How do I know how much my mineral rights are worth?

Finding out how much your mineral rights are worth can be difficult. The value of mineral rights can vary day-by-day, because the market value of minerals is determined by calculating how much buyers would pay for mineral rights today. There’s no easy way to calculate how much your minerals rights are worth. One of the best ways of knowing the current value is to list mineral rights for sale and see how much people are willing to buy them for.  You can also list them on US Mineral Exchange.

Q: Will mineral rights increase my taxes?

Yes – if you are currently making a profit on those minerals. Unexercised mineral rights (if you are not currently making money from the mineral rights) are not taxed. If you sell those rights, you have to pay taxes on the proceeds. Income made from the minerals is taxable income.  But having valuable minerals and oil on your land can also increase your property value, which will be helpful when it comes time to sell.

Q: What are common mistakes people make when selling their mineral rights?

One is accepting the first offer on mineral rights. Don’t accept the first offer you get. Offers are the best way to gauge the price of mineral rights, so wait until you have a few offers to figure out what your mineral rights are worth and the best price for them. Mineral rights can be incredibly valuable, so take your time finding the best buyer. Another mistake is listening to rumors. Many people think the best way to figure out the value of their mineral rights is by asking their neighbors about their mineral rights and assuming yours will be similar. DO NOT DO THIS. The minerals in land range wildly from property to property.

Q: Can I buy the mineral rights to a property that isn’t mine?

A: Yes! This is becoming more common as the value of oil and minerals goes up. You need a real estate deed that details the mineral rights as well as proof of ownership of the mineral rights, a warranty deed, and legal documents. Learn more about buying mineral rights here.

Although we have covered a fair amount in this article, it still only scratches the surface of everything there is to know about mineral rights. Mineral rights are complex, but understanding the basics is a huge step forward to becoming a mineral rights expert.

About the author: Laura Barker is Marketing Assistant for the REALTORS® Land Institute. She graduated from Clark University in May 2017 and had been with RLI since October 2017.