Should you Sell Mineral Rights
Figuring out whether you should sell mineral rights or hold onto them is a difficult decision.
You’ll find strong opinions on both sides of this argument because there is no right answer. The decision to sell mineral rights is a personal one. Since it’s a personal decision, the best thing we can do is lay out the pros and cons of selling mineral rights. You will need to take some time and consider your options. Whether selling mineral rights is a smart decision for you is only something you can determine!
The Case for Holding Onto Mineral Rights
If you are in a financial position where you don’t need the money for anything and you are willing to hold onto your mineral rights for a long period of time (10+ years), holding might be the right option for you. Here are some of the benefits of holding onto your mineral rights:
- Leasing: When you own the mineral rights, the first step in the drilling process is leasing mineral rights. You will receive a lease bonus when you lease your mineral rights to an operator. Think of this lease bonus as a rent payment on your property. They don’t own the property, they simply have the option of drilling over a 3 to 5 year period. You can make money by leasing your property out numerous times. If they don’t drill, you still own the property and you can lease the property again and make more money.
- Royalties: When you hold your mineral rights, you are hoping that your property is leased and eventually drilled on. Once drilling occurs and they locate oil and/or gas, you will be paid for your proportionate share of the income. This income from the oil and gas production comes in the form of a royalty check. These royalty checks are the benefit you receive for holding onto your mineral rights. Once the royalties are being produced, you’ll simply get a check in the mail each month. Your checks will slowly decline over time until eventually you no longer receive checks because there isn’t enough production.
The Case for Selling Mineral Rights
There are a large number of people who would tell you that you should never sell mineral rights. This is bad advice!
It’s important to understand that selling mineral rights depends on your personal situation. The decision to sell mineral rights ultimately comes down to many different factors. The factors below are legitimate reasons why many mineral owners are deciding to go against the antiquated advice to never sell mineral rights.
Here are some of the benefits of selling mineral rights, which are also some of the most common reasons people decide to sell mineral rights:
- Diversification: If the value of your oil and gas mineral rights is greater than 5% of your net worth, we recommend selling. Why? Mineral rights are not diversified. The market value can change drastically based on the price of oil and many other factors. Most mineral owners have ownership concentrated in one area. If that area goes down significantly in value, so does your net worth. You would be much better off selling the mineral rights and buying a total market ETF like VTSAX which will give you broad diversification and an average 1.75% dividend yield.
- Control: If you own a rental property or you have stocks, you control what happens with these assets. For your rental property you can raise rents, update the rental, change management, pick quality tenants, etc.. For your stocks you can pick highly diversified ETF funds and if you want to sell, it can be done in literally seconds. When you own mineral rights you have zero control over what happens. When leasing mineral rights you simply have to wait until you get approached. After leasing, the oil and gas operator determines whether or not to drill. You have no control over the revenue being produced or when that revenue is produced.
- Taxes: One thing that a lot of mineral owners fail to take into account is their tax situation. If you are in a high tax bracket (or even if you aren’t), your mineral rights are taxed as ordinary income and taxed at your highest marginal tax rate. Let’s assume you are going to collect $100,000 in royalty income. At a 40% tax rate (state taxes + federal taxes), you are going to pay over $40,000 in income taxes. Now, let’s assume that you inherited mineral rights when the price of oil was $50/barrel and that today the price of oil is $60/barrel. Your basis in the inherited mineral rights would be $83,333, meaning you would only show a taxable long term capital gain of $16,667. This means you would only pay taxes of 20% on $16,667 or $3,333 in taxes due. Would you rather pay taxes of $3,333 or $40,000 on $100,000 in income? This isn’t even taking into account the time value of money. Our tax article provides a more in depth explanation to determine your basis in inherited mineral rights. You should also consult with a tax accountant before making any decisions.
- Timing: Many mineral owners sell mineral rights simply because they don’t want to wait years to see if any drilling occurs. The process of leasing your mineral rights and then waiting for drilling to occur can take a minimum of 5+ years and that’s if things are going quickly. If you don’t want to hold onto the property for 10+ years to see what happens selling mineral rights make sense.
- Gamble: Holding onto your mineral rights can be a gamble. Some people hold onto their property for literally decades and nothing ever happens even after they have been leased multiple times. There is no assurance any drilling will take place even after you are leased. In addition, the value of the royalties could turn out to be less than expected. You could spend years waiting for drilling to occur and it either never happens or produces very small royalties.
- Retirement: A lot of mineral owners choose to sell during retirement. Many retirees decide to sell to avoid paying taxes each year and to put some cash in the bank. In addition, the sale of mineral rights converts the property into cash which makes estate planning significantly easier.
- Financial Need: There are many individuals who find themselves in a financial situation where they need to sell. They might be losing their home or have unforeseen medical bills comes up. Regardless of the reason, selling mineral rights to meet this short term obligation is never a bad decision. Losing your home and letting your credit score go down the toilet doesn’t make sense if you own mineral rights. It’s better to sell mineral rights and help meet that need.
Long Term Outlook for Oil and Gas
Putting politics aside, the long term outlook for oil and gas is uncertain. As the world turns towards renewable energy, demand for oil and gas is likely to fall as alternative sources of energy replace them. The question is when?
We believe the that oil and gas will continue to be dominate source of energy over the next couple of decades. However, at some point in the future other technologies will take over. Whether that’s wind, solar, nuclear, a combination of these technologies, or something we don’t even know about yet is impossible to know. What we do know is that oil and gas will not always be the primary source of energy.
Many mineral owners have held their mineral rights for decades because the oil and gas must be used at some point right? In 1950, we couldn’t have imagined a world where oil and gas didn’t provide all of our energy needs. With the introduction of new technologies and a shift towards more environmental friendly energy solutions, that way of thinking is shifting.
You may find yourself holding onto mineral rights in 20 years that are worth substantially less than they might be worth today if a new form of energy starts to take over. By the time you realize that form of energy is making mineral rights obsolete, it is likely too late.
Whether you are agree or not, if you own mineral rights you should be keeping a very close eye on new energy sources.
Your personal decision
Deciding whether to sell mineral rights or hold onto them is a difficult question. If you find yourself conflicted over whether to sell mineral rights or hold onto them, remember that it’s your decision. Every person has unique things going on in their life. Every person has to make the decision that will best benefit their family.
Contact US Mineral Exchange:
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.
The more information you can provide about your property the better! We can give you a better idea about the value of selling mineral rights if you provide more information. The most important thing we need is for you to answer the questions and provide your state and county.
If you have the required documents to list, providing those is extremely helpful!
Absolutely not! When you inquire at US Mineral Exchange we will not be putting any pressure on you to sell. We will help answer any questions you have whether you are interested in selling or not.
At US Mineral Exchange, we take privacy very seriously. We will NEVER sell your information or use it without your consent. When you send us documentation or tell us about your property, that information does not go outside our company without your consent. Even when you list a property for sale on our website, we strictly control who has access to the information about your listing so that only legitimate buyers will be able to see property details.
Many mineral owners make the mistake of getting an offer and quickly selling. They then accept an offer far below market value because they felt pressure to sell. There is nearly always a better price available.
Imagine you were selling a home. Would you get the best price from a random person who walks up and makes you an offer? No way! Now imagine you list the home on the MLS where thousands of potential buyers know your house is for sale. The key to getting the best price is competition. Our guide to selling mineral rights explains everything.
The reason that so many mineral owners decide to sell mineral rights at US Mineral Exchange is access to our large network of mineral rights buyers. Our goal is to help you get top dollar for selling mineral rights by getting your property in front of a huge audience of buyers. This allows buyers to compete against one another which ensures you get fair market value for selling mineral rights.
There are absolutely no cost to list your property. When you locate a buyer by listing your property with us, we are paid a commission directly by the buyers closing agent. This means you never have any out of pocket expenses ever. We only get paid if we can get you a better price than the current offer you have in hand.
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