Common Mineral Owner Mistakes
There are a lot of ways to be taken advantage of when selling mineral rights. The reality is the most mineral owners get taken advantage of in some way. Unfortunately, most of them don’t ever realize they were taken advantage or figure it out too late.
Over the years we have seen this first hand. A lot of mineral owners fall into the same traps over and over again. You can avoid all of the issues below by listing at US Mineral Exchange. We are the industry experts when it comes to selling mineral rights. We can help you avoid these common issues, sell for the best price, and ensure a smooth closing process.
Before you sell, consider the following common mineral owner mistakes below. Some of these you can easily avoid on your own, others are nearly impossible to detect or avoid unless you work with an industry expert.
For Sale By Owner
We are biased. Let’s get that out of the way up front.
We help people sell mineral rights and we are biased to persuade mineral owners to utilize our service rather than sell on their own.
Despite the fact that we are biased, selling mineral rights on your own is the single biggest mistake that you can make as a mineral owner.
Why? You will make less money.
A lot of mineral owners believe they can sell mineral rights on their own. They are right! Selling mineral rights on your own is honestly not that hard. If your mineral rights are remotely decent, you will be getting offers in the mail. You can quickly get online and find mineral buyers who will make you additional offers.
You simply select the highest offer and get the best price right? Wrong!
What most mineral owners do not realize is that there are thousands of mineral buyers out there. When you sell minerals on your own, you will almost never get a fair market value. The reason is that you simply cannot contact enough mineral buyers to get a good deal. The price that each mineral buyer is willing to offer will vary dramatically.
Here is where most mineral owners get confused and accept a below market value offer.
They gather a handful of offers, compare those offers, negotiate the highest offer up a bit more, and then accept the offer. You are convinced you got a good deal because you got the best price among the offers you found. What you didn’t realize is that there were literally thousands of other mineral buyers out there who would have paid a better price.
The picture below illustrates our point. Most mineral owners compare just a handful of offers and select the best. It seems like a great deal when you compare the lowest offer to the highest offer.
Unfortunately this is a trap that most mineral owners fall into. It’s easy to convince yourself that you can do this on you own. It’s easy to convince yourself that you are “happy with the offer” you found. The reality is that you are leaving thousands of dollars on the table.
The only way to ensure you get the highest price is through competition. When you sell mineral rights on your own, you are virtually guaranteed to sell below market value.
Accepting the first offer to sell mineral rights
One of the most common mineral owner mistakes we see is accepting the first offer you receive. When you receive an offer to sell mineral rights, it’s tempting to quickly accept it. We see many mineral owners accept the very first offer presented and walk away from a substantial amount of money.
Imagine that you were selling your home and only one buyer ever came to see the property. Do you think you would get the highest value? No way!
Now imagine you listed your home on the MLS so that it can be seen by thousands of buyers. When thousands of buyers know your property is available these buyers must compete against one another. This forces buyers to make their best possible offer which ensures you get top dollar when selling mineral rights.
A lot of mineral owners fell rushed into a decision. They quickly sell to the first offer they get and end up leaving substantial money on the table. Don’t let that be you!
Mineral Rights Flippers
A mineral rights flipper is someone who puts your property under contract at an agreed upon price. They then turn around and sell the contract to another buyer at a higher price. This is extremely common with mineral rights.
The mineral rights flipper will try and put you under contract for the lowest amount possible. Once you agree to a price they find someone else to pay a higher price. In this industry, it is not uncommon for there to be multiple flippers involved in a single transaction.
The worst part about a mineral rights flipper is that they pretend to be a mineral buyer! A mineral rights flipper will not tell you they are flipping. They will say they are “buying” your mineral rights. Then, their “partner” will come in at the last minute and purchase the property.
It is nearly impossible for most mineral owners to determine whether a mineral buyer is legitimate, or whether they are flipping. At US Mineral Exchange, we have processes in place to weed out mineral rights flippers. Our goal is to connect you to an end buyer so that you pocket the maximum amount possible from the sale of mineral rights.
Mineral Rights Brokers
There are a number of mineral rights brokers to pick from when selling mineral rights. As we mentioned above, we do not recommend selling mineral rights on your own. There are simply too many ways to be taken advantage of and you will never get a fair price.
However, you need to be cautious about selecting the right broker.
Did you know that a lot of mineral rights brokers are actually just mineral buyers? Some mineral buyers set up websites that appear to be a marketplace. When you inquire they bring you “offers” that are really just them making you an offer.
If you believe you are getting competitive bids, but in reality you are just getting a single offer, you are going to sell below market value.
Here are some additional red flags to look out for when selecting a mineral rights broker:
Listings: This may seem obvious, but if you visit a mineral rights broker’s website and they don’t have any listings, they are likely a mineral buyer.
Information: Does the mineral broker have an easy to navigate website, full of valuable information to help you understand the process?
Mineral Rights Focused: Some mineral rights brokers do it all. They will handle wind, solar, timber, music, or any other type of ownership that generates royalty income. The problem is that a buyer who purchases wind rights is not the same buyer who purchases mineral rights. If your broker doesn’t have a strong network of oil and gas mineral buyers, they will not get you the best price.
Value Estimate: Any broker who claims they can tell you an exact market value for your mineral rights is likely a buyer.
Proven Experience: It’s now extremely easy to set up a basic website and appear legitimate. Find out how long the company has been in business. US Mineral Exchange has been exclusively focused on maximizing value for mineral owners since 2012. During that time we have seen a lot of mineral brokers come and go.
Selecting the right mineral rights broker is a very important step. Take your time and carefully consider your options to ensure you get the best market price.
Purchase and Sale Agreements
The purchase and sale agreement (PSA) is an important step when selling mineral rights. A lot of mineral owners get taken advantage of when they sign a PSA.
Are you familiar with the difference between a net mineral acre and a net royalty acre? If the PSA is based on NDI instead of NMA, how does that affect the adjustments allowed at closing? Is the due diligence period being requested reasonable? What recourse do you have if the buyer doesn’t close?
At US Mineral Exchange a large part of the value we provide is helping you navigate the purchase and sale agreement. We know the red flags to look for. We understand how buyers typically take advantage of sellers. Attorney’s who do not specialize in mineral rights transactions frequently miss important items on the PSA. It’s important to have a trusted advisor to help you navigate the process and ensure you get a fair deal.
Not Understanding Market Value
Most mineral owners do not understand what market value is. The market value for mineral rights is what a buyer is willing to pay today for your mineral rights. You cannot expect a mineral buyer to pay for what might happen in the future.
A lot of mineral owners will say things like, “we all know the price of oil will be higher in the future” or “when they drill a new well” or “when that new pipeline is finished” to justify their asking price. This is not reality. You cannot sell mineral rights above market value simply because they might be worth more in the future.
Oil and gas is boom or bust! We have seen areas explode in value within just a couple years, only to implode in value just a few years later.
What matters is what your mineral rights are worth today. A mineral buyer will take a long term approach to investing in mineral rights, but they do not ignore the current price of oil, current royalty income, and other factors that determine the value of mineral rights.
Flush Production and Decline Curves
If you recently started receiving oil and gas royalty income from new production, you need to understand what a decline curve is. Depending on your location within the United States, the steep portion of the decline curve varies from 3 years to 5 years.
When an oil and gas well is first drilled, there will be an extremely large amount of oil and gas production at the beginning due to fracking. Fracking enables us to quickly extract a large amount of oil and gas during the first few years. After the first 3 to 5 years have passed, the income will start to level out over time at a much lower level than it was in the previous years. From there, it will slowly decline over the next several decades.
If you decide you want to sell mineral rights while your well is in “flush” production during the first few years, you need to understand that the offers will appear to be low. The reason is that you may have received $25K the first year, but that number is going to rapidly decline over the next few years.
Another common mistake we see related to this is when a mineral owner decides to sell in year 3 to 5. After the first few years of very high check stubs, a mineral owner will look back at some of the offers they got. If you got an offer for $100,000, and then collected another $75,000 in royalty income, a mineral buyer is not going to pay the $100,000 they originally offered. Once the oil comes out of the ground it is gone forever!
Remember, the value of your mineral rights is based on what a buyer is willing to pay today for your mineral rights.
Avoid Common Mistakes by Listing at US Mineral Exchange
When you list your property at US Mineral Exchange, we help you avoid common mineral owner mistakes. We guide you through the entire process and ensure that you get maximum value when you sell. We are industry experts who can help get your property in front of the right audience. These buyers will compete against one another to pay you the highest value for your property.
If you are interested in moving forward with a listing mineral rights please fill out the form below.
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If you have questions about your mineral rights, we’re here to help! We speak with mineral owners every day and we look forward to hearing from you. Please don’t hesitate to fill out the form below with any questions and our friendly team will respond quickly.
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