Selling mineral and royalty rights is a personal decision and can be an emotional one as well. While we believe interest owners should consider our top 7 Reasons for Mineral Rights Sale, everyone’s motivations are different. The process of selling minerals and royalties can also be a complex process. To ensure a successful transaction between all parties and avoid common pitfalls, read our 7 expert tips below.
#1 Don’t Rush Into Signing Anything
First and foremost, don’t let mineral buyers rush you into signing any purchase or intent to sell contracts. Oftentimes, they assume you are uninformed and may try to quickly lure you into signing a Purchase and Sale Agreement filled with vague or misleading language with the hard note that their offer will expire within a short time frame. This should be the first red flag to be on your guard with a buyer like this. I’ve encountered many clients who intuitively knew something wasn’t right and called to discuss these so-called rush offers from mineral buying companies. 6 times out of 10 these offers are unfairly low and are part of a bait tactic that I highly disapprove of.
Learn more about the stages buyers go through to give you a mineral price.
Bottom line: you have time; don’t let anyone try to scare you into thinking you don’t. If you are receiving more than a few offers then that means there is significant interest in your assets, some activity must be going on in the area or is in the planning stages. At this point, it’s best to move onto finding a professional Landman to help with next steps.
#2 Engage a Professional Landman to Help
Equally important as the next tip, Know the Buyer and Their Intentions, is to find an honest and experienced Landman who is an expert in the area your interests are located. Ask around for referrals, read reviews from trustworthy sites, and set up a call to speak with them. Interview them and don’t sign anything until you feel confident about working with them. You should know almost right away whether they know what they are doing and if they will work in your best interest.
Landmen work independently or for an oil and gas firm. Read this article to learn about the differences between an Independent and In-House Landman and what to ask when engaging with one.
Read now: In-House vs. Independent Landman: Which One is Best?
Mineral buying companies have their own Landmen; they are working for the best interest of their employer and are typically doing due diligence work, or contacting you to lease or buy your interests, not selling interests for individual clients. These are very different methods of work and experience.
Venergy Momentum is an independent mineral and royalty consulting firm specializing in services related to mineral and royalty management and ownership. Owner and founder, Kyle D. Venema is a Landman with over 15 years experience. Read our client testimonials and 5-star Google reviews.
#3 Know the Buyer and Their Intentions
When selling mineral and royalty rights, knowing your buyer is essential. Doing research and asking the right questions is exceptionally important to understand how they plan to work on your behalf. If you don’t know what to look for or questions to ask, this is another reason to engage an industry professional who not only has many years of experience, but also has a large network of mineral buyers and knows how to market your assets and negotiate with them.
Mineral buyers all over the US value assets differently. They have different areas of interest they are focused on causing many different factors that affect their mineral prices. While one buyer may offer a low value for your interests, another might offer significantly more. The behaviors of mineral buying companies are not black and white, which is why it’s vital to know what areas they are focused in, what prices they are paying, their buying strategies/methods, etc. Their trajectory is also constantly changing so it’s best to work with someone who keeps up to date with their movements and stays in regular contact with their buyers.
#4 Know What You Own Before You Sell
At Venergy, we apply patience and take the time to know exactly what you own from the start. Too many times early on in my career I came across shady middle-men who didn’t put in the time and effort to perform proper due diligence on their client’s assets. It was a disservice to their clients and also to themselves. If the client actually owns more than they think they do, then the buyer will find out that information during their own due diligence stage and guess what, they won’t tell you. Instead, they will include in their Purchase and Sale Agreement a clause that states something like they will pay you X amount of dollars for all, right, title, and interest you own…There will not be any specifics as to the price per mineral acre or royalty acre, it will be very vague leaving a lot of unknowns and potential for loopholes to work in their favor.
You and your inattentive middle-man will have missed out on thousands more if only they had done the proper due diligence title work beforehand to find out what exactly you owned. It’s like spending thousands on a car before knowing how many miles are on it!
You must know all the details of what you own, or as much as you possibly can, before it’s presented to the buyer market to get the best value. Period. Due diligence and title work fees may need to be incurred, but it’s worth it to have all the leg work done beforehand. Buyers will have questions surrounding the interests or the title and it doesn’t look very good when they are told, “I don’t know….”. That’s their cue that you don’t know what you are doing, what you own, and therefore are a prime target for a lowball offer. Or, they will simply just walk away because they don’t want to try and understand the opportunity.
It’s our job to find out all the answers buyers may ask so when they see the deal, they will know within 5 minutes whether or not this is a deal they want to spend their time working up and trying to buy. I know if I have questions about the asset(s), buyers will have questions too and that’s a fact.
#5 Don’t Rely on Automated Calculators to Give Your Mineral Rights Value
There are many mineral buying companies that offer on their website a calculator that will give you the mineral value of your interests. All you need to do is enter a little bit of information from your royalty check stubs, lease royalty percentage, and bam, your value is magically determined. But is it true?
I can tell you from personal experience the results are greatly skewed based on a number of factors. I perceive tools such as these as being very deceiving and another bait tactic to get interest owners to contact them to buy or sell their minerals.
A recent client of mine called me to claim that his assets were worth millions based on using a calculator like this one on a popular mineral buyer site. After further research, I discovered the software was giving him a very wrong value because the system was reporting misinformation. At first, he was shown that his interests were worth in the mid-$5mm range, but once we had the reporting issue fixed it told him his interests were worth around $15k, but when in fact, they’re worth in the $500k range!
This particular website’s valuation of mineral rights produced two very different, and very wrong, mineral values. There is not a calculator built that can give you an accurate value for your mineral interests because these systems don’t consider the non-technical factors needed to determine your mineral rights value. Some of these non-technical factors are:
- Who is the current Operator? This makes a huge difference to buyers since they track Operator well success/failure rates
- How much acreage does the Operator have to drill? When are they going to get around drilling your particular interests? How many wells are they typically drilling?
- What are the current mineral buying market conditions? Politically and geopolitically speaking?
- What is the current price of oil and gas?
- Additionally, mineral buyers have a forever moving target of buying parameters, such as:
- Do they have a fresh fund or are they finishing up buying in a fund?
- At what stage and how aggressive are they buying?
- Are they trying to do a 1031 exchange?
Buyer criteria is always fluid; sometimes certain buyers are aggressive and other times they’re not even considering buying in a certain area because their area of interest has suddenly changed. No system exists that is able to capture this information.
We have 6 calculators on our website to help owners calculate critical information such Net Mineral Acres, Net Royalty Acres, and Division of Interest. Read this article to learn about what these terms mean in mineral and royalty ownership. They are not to be used for determining mineral rights value. If this is your goal, the best tip is the next one, #6.
#6 Test the Buyer Market for Your Mineral Rights Sale
The only true way to get an accurate current mineral appraisal, or mineral interest value, for your assets is to see what buyers are willing to pay for them. This is because value for anything is in the eye of the beholder and as explained, they all value assets differently. Recognize first that there are two types of mineral and royalty appraisals – Current and Retrospective. In this capacity, we are referring to Current appraisals which give you the value of your interests as they stand today.
Retrospective appraisals are for inherited interests and you can read more about them here.
Read now: Do I Really Need an Appraisal?
Presenting your assets to the mineral buyer market is the very best way to answer the top question-how much do mineral rights sell for? We’ve been doing this for countless clients over the past decade who were once receiving low offers and the results have been phenomenal. We dedicated an entire blog to this topic, check it out here.
Read now: Testing the Buyer Market to See How Much Your Minerals are Worth – Does it Work?
#7 Know the Tax Implications of Selling Mineral and Royalty Rights
Selling mineral and royalty rights can come with significant tax obligations. Depending on how long you owned the assets before you sold them, you may be subject to either ordinary income tax or capital gains tax. It’s important to consult with a tax professional to understand the full impact on your tax liabilities.
If you’ve inherited mineral rights, know that if your assets are producing you will be required to pay annual property and school taxes. You will also be required to pay taxes on the sale of inherited rights, in which you will also need a Retrospective appraisal to help reduce your tax liabilities on the sale. Watch our video on inherited rights here.
Planning ahead for taxes can save you from unexpected surprises. For example, in some cases, you might benefit from a 1031 exchange, which allows you to defer taxes by reinvesting the proceeds into similar property. A financial advisor can help you explore all available options.
Selling Mineral and Royalty Rights Safely
Selling your mineral and royalty rights can be a lucrative decision, but only if you approach it with caution and the right guidance. Taking the proper steps and utilizing the tips provided will help you avoid common mistakes and help to ensure you make educated decisions so all parties achieve a successful mineral rights sale. If you’re ready to take the next step, contact Venergy Momentum today. We’re here to help.
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