As you debate whether or not to sell or lease your land’s mineral rights to a local oil and gas company, several questions spring to mind. One initial concern for landowners is how having an oil well on your property will impact the overall value of your land. Does an oil well improve or decrease the value of my property? Will oil drilling impact my chances of selling my home in the future?
Understanding Your Land Ownership
When you sell or lease the mineral rights to your land, you’re giving an oil and gas company permission to drill for minerals beneath the surface of your property. The land where your home, pastures, garage, barn and other buildings reside is considered surface rights. Deep below the soil begins the mineral rights portion of your property. In order for oil and gas companies to access the subterranean space, they will need to set up their production facility and oil rigs on a small portion of your land at the surface.
The Value of Your Property Rights
By working with an oil and gas company you may be minimizing the attractiveness of your surface property to potential buyers or renters. If you have an oil rig on your land, it’s obvious you don’t have the ability to sell or lease both the property and mineral rights. This may turn some potential buyers away.
However, people looking to rent a pasture, house or storage building probably won’t care since they don’t have a long-term interest in the property.
Does your home rely on well water? Since shale gas drilling may effect the quality of ground water, your property value could decrease due to an unstable supply of clean water.
How Your Mineral Rights Are Valued
If you choose to lease or sell your mineral rights to an oil and gas company, your property value will decrease because you can’t sell the whole package: both mineral and surface rights. However, you are making money from the active extraction of minerals, which may help offset the decreasing value of the land.
Take the time to weigh the monthly income from the mineral rights lease and royalty payments against the fluctuation in comparable land values in your area where oil rigs are present. The difference may cancel one another out. Or, the loss of property value may not be worth the extra income you receive from drilling.
Negotiating the Best Deal
Before signing a mineral rights lease, have your land appraised. Ask the appraiser how much the land will be devalued by adding the oil rig. Use these figures to help negotiate the sign-on bonus and royalty payments with the oil and gas company. Explain that you’re trying to compensate for the loss of land value, so when it’s time to move on, you can accept a lower payment for the sale of your land.
If you live within a mile or two of an active drilling site, your property value has probably been impacted. Think about the comparable properties in your neighborhood or area. If everyone is allowing oil rigs on their land, you may as well too since the land values surrounding you have already decreased.
For example, the oil and gas boom in Colorado makes headlines often. If oil rigs were to dot the landscape in Longmont, Colorado — a community of 88,000 people — homeowners would see an estimated 15 percent reduction in property values, which would equal a loss of $1.2 billion based on a 2013 estimate.
These predictions are having a negative effect on both real estate companies and mortgage lenders. If people can’t sell their property at a profit, or at least for what they bought it for, they won’t move. If fewer people are selling and buying, the mortgage companies feel a downswing in business.
As you accept a signing bonus and monthly royalties on the oil and gas extracted from your property, you should also consider how this process is impacting the overall value of your property and ability to move in the future. Oil well property values vary from state to state. Talk with your local landman to learn more about oil rigs and property values in your community.