In the United States, there’s a tradition when it comes to buying a home: You own the home that sits upon the land, and you also own what’s below the ground.
But there’s a new phenomenon in the housing industry: You buy the house, but the seller keeps the mineral rights. So far, this trend is mostly limited to new homes in planned neighborhoods and gated communities. Nevertheless, all buyers need to be aware of the trend.
Selling or leasing mineral rights has become a multi-billion-dollar industry in the United States. Recent advances in technology are allowing the extraction of oil and gas from shale rock formations deep underground. The ability to extract oil is fueling the biggest energy boom in modern U.S. history.
“Horizontal drilling and the controversial practice of hydraulic fracturing, or “fracking,” have opened vast swaths of the continental United States to exploration,” according to a recent report by Reuters. This has prompted builders and developers to increasingly — and quietly — retain the valuable mineral rights underneath the homes they build.
This practice is not just limited to the traditional oil-rich parts of the United States, like Texas and North Dakota.
“All the smart developers are doing it,” said Lance Astrella, a Denver lawyer who represents mineral-rights owners, including homebuilders, in deals with energy companies.
Among the builders who are engaged in this practice are Texas-based D.R. Horton, the biggest homebuilder in the United States.
“D.R. Horton has separated the mineral rights from tens of thousands of homes in North Carolina, Alabama, Mississippi, Virginia, New Mexico, Nevada, Arizona, Oklahoma, Utah, Idaho, Texas, Colorado, Washington and California,” according to the report.
Other builders who are keeping the mineral rights include the Ryland Group, Pulte Homes, Beazer Homes, Oakwood Homes and Shea Homes. (Pulte and Shea build in Washington state.)
The status of mineral rights is not an issue that real estate agents have had to deal with in the past, and disclosure forms don’t specifically address mineral rights. A quick review of the Form No. 17 (Seller Disclosure Statement), completed by sellers in Washington state at the time of sale, shows no specific reference to mineral rights.
Not assessed, covered
Homeowners who don’t own their mineral rights often pay just as much in property taxes as those who do. Appraisals and tax assessments rarely, if ever, address mineral rights when determining the value of properties, especially in states with little experience of oil and gas drilling, says John S. Baen, a professor of real estate at the University of North Texas, who has studied the impact of drilling on property values.
“The tax offices have no clue what to do,” he said. “They don’t understand it at all.”
It will come as no surprise that homeowner’s insurance usually excludes damage from “industrial operations.” So if your home is damaged from drilling operations below ground, you should expect that your insurer will deny coverage, especially in the case of homes where the mineral rights have been severed from the property.
Title insurance companies are also exempting anything to do with mineral rights from policy coverage.
State laws are struggling to catch up with this issue. No laws anticipated the ability to drill horizontally for miles underground to access deposits of gas, oil or minerals.
For now, homebuyers will need to invest more time to carefully review title documents associated with the property they are purchasing. Ask the title company for help in identifying any documents recorded against your deed; your agent can assist you, as well.
With consumer protection clearly lagging behind this issue, this is a case of caveat emptor: “Let the buyer beware.”
RAY AKERS has been a licensed Realtor for more than 25 years in Seattle. Send your questions to firstname.lastname@example.org or call (206) 722-4444.