Welcome to Episode 5 of the Mineral Rights Podcast!
Using the embedded player above, you can download the episode to your computer or listen to it here!
In this episode, we talk about 5 red flags to watch for when it comes to selling your mineral rights and royalty interests. We also cover the common steps you might expect to go through if you sell your minerals or royalties.
As always, your mileage may vary and this should not be construed as investment or legal advice. Please consult your accountant, financial advisor, or attorney for advice specific to your situation. That said, we hope this is useful information!
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Key Points:
In this Episode, we again feature special guest and fellow mineral owner Justin Williams.
Justin and Matt discuss the typical process you will go through when selling your minerals and what to look out for. Listen to the end to find out more about 5 potential red flags you should watch for.
You Will Learn About:
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The Typical Process for Selling Minerals
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5 Potential Red Flags to Watch for When Selling Mineral Rights or Royalties
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Due Diligence
- The seller may be asked to provide a copy of oil and gas lease, check stubs, and other supporting documentation to help the buyer validate Net Revenue Interest (NRI).
- The buyer will research your property and any offsetting activity (permits, leases, production from existing wells, spacing orders, etc.).
- The seller should due some due diligence on potential buyers to make sure they are reputable and to find out other seller’s experiences in dealing with the company.
- If you haven’t received any offers but want to sell, you can research active buyers in your area and do due diligence on them. You can pick those that seem like they are the best fit for you and proactively contact them to get offers.
2. Valuation
For an overview of how mineral rights are valued and the steps involved, please listen to Episode 4 where we cover this in-depth.
3. Offer
When you receive an offer from the buyer reviews offer, it is important to think carefully about decision and understand how it fits into your personal and financial goals. Consult any advisors beforehand if you are unsure.
4. Decision
Once you reach an agreement and accept the offer to sell your minerals, the buyer will typically create necessary agreements and closing documents.
- You may talk with the buyer on the phone during the negotiation process but once you agree on the final terms, make sure you get the offer in writing.
- Be aware that once you are under contract, you are obligated to sell to that buyer (usually wording will prevent you from selling to another buyer for a higher price during the contract period).
5. Agreement
The full terms of the sale will be outlined in an offer letter. This includes the purchase price, effective date, closing date, and individual responsibilities of buyer and seller.
6. Title Search
- Before the buyer will close, they will typically perform a title search. The purpose of the title search is to verify that you own the property in question.
- What is a title search? A title search is the process of researching the historical ownership of the property to locate any transfers of ownership and/or the separation of the mineral rights from the surface rights over time, typically back to patent (the first granting of the property from the U.S. Government to a private individual). We talk about how to perform a title search in Episode 10.
- How much does it cost? A title search may cost upwards of $2000 for a limited title search of one tract of land with a relatively clean chain of title to many tens of thousands of dollars for more extensive properties with a complex chain of title.
- How long does this take? For a single property in one county, the review period can take from a few days to a full week. For more complex title searches, this process can take from a few weeks to up to a month or more to complete.
- Assuming you have clear and marketable title, buyer will then prepare the necessary conveyance documents required for you to sell your property. They usually will bear the cost of this step which can often be expensive. If you have significant title defects, you could be responsible for paying legal fees to fix them.
7. Closing
The final step is the actual closing where a mineral deed is executed and notarized in exchange for payment. Sometimes, escrow services from a neutral third party such as a bank or an attorney are used to handle closing.
5 Red Flags to Watch Out for When Selling Minerals:
- Purchase and Sale Agreement that gives you a low offer without even talking with you first. How do you know if it is low? Listen to Episode 4 about how mineral rights are valued. It is obvious they haven’t done much if any due diligence to justify the offer. Reputable companies that are in it for the long haul do their homework.
- Bank Drafts. Depositing may be legally binding. They take time before funds are available. Most reputable companies will provide certified funds in exchange for a mineral deed. This includes a cashiers check, certified check, or wire transfer in exchange for a signed deed. A bank draft is not a check and funds will likely not be available the next day in your account!
- Selling your minerals when all you think you are selling is a non-participating royalty interest. Be sure to read the fine print of any documents you sign and get help from an attorney or qualified advisor if you are not sure. There is a difference between a mineral acre and a royalty acre.
- Time Pressures to accept offer without adequate time to review. Mineral and royalty transactions are complicated by nature. Companies need adequate time to research title and you need adequate time to review the offer and consult any advisors. Be wary of offers that expire within 24 hours or of buyers that pressure you to sell immediately. If you need longer to review documents, ask for an extension (in writing, if possible)!
- Signing away any payments that might be in suspense or any escheated payments when you don’t realize it. Companies should be up-front with you and say that you may have escheated funds or funds in suspense and that they are buying this as part of the deal. You can do some quick research to see if you have any funds that have been escheated to the state.
Links of some state websites where you can research escheated funds (escheated funds = unclaimed $$):
- Colorado: https://colorado.findyourunclaimedproperty.com/
- Oklahoma: https://www.ok.gov/treasurer/Unclaimed_Property/
- Texas: https://claimittexas.org/
- Wyoming: https://statetreasurer.wyo.gov/UnclaimedProperty.aspx
To find your state just search for the state name and “unclaimed property” or “escheated funds”.
Thanks for Listening!
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Thanks again to Justin Williams for joining me this week and providing the mineral owner’s perspective. Until next time!
Matt
