Severed Mineral Rights

[SwampFox]

Just came across a contract for a new home sale that conveys everything except mineral rights. Subject is in a well established planned community.

With mineral rights severed, am I now appraising something other than the fee simple interest? "Fee simple surface rights"? If this is now less than fee simple, how would I appraise since this is not something I've ever seen disclosed and I could never find a comp with similar interest conveyed?!?

 

[Restrain]

Technically you are correct. However, for the benefit and understanding of the client, as well as Fannie (assuming a typical mortgage lending assignment) the definition remains the same. Don't go changing the definition in the report. Comment that the minerals have been severed prior to the development, and if there is any production in the area which would impact the subject.

That being said, if you use sales from the same or similar development, you are using sales which have the same influences with the same impact or lack thereof. Just comment.

Having appraised for decades in Texas where such severances are common, when the Barnett Shale took off in North Texas, there were many properties that still had the minerals attached, and a value could be extracted from sales and listing of properties of the value of mineral interests. Comments about the presence or severance of minerals were such that we had canned comments (production, etc). In addition, the proximity of production and the ability of a driller to gain access to the property, impact for potential drilling activity, etc all can affect properties, primarily acreage developments.

In your instance, if the minerals are not producing, and there is no activity, a simple comment should suffice.

 

[Restrain]

On other thing. If the builder is retaining the mineral interests as opposed to the developer, if you look at the deeds by this builder, you will probably find the same thing. Further, if there is no production in the area and no leasing activity, the severance may have no market impact. Sounds like a little deed research on-line may be necessary. Also, look at other prior builder sales and see if the sales indicated a market impact. Again, comment.

 

[SwampFox]

On other thing. If the builder is retaining the mineral interests as opposed to the developer, if you look at the deeds by this builder, you will probably find the same thing. Further, if there is no production in the area and no leasing activity, the severance may have no market impact. Sounds like a little deed research on-line may be necessary. Also, look at other prior builder sales and see if the sales indicated a market impact. Again, comment.

I thought the same thing so I've been looking at other deeds from this builder's recent sales in the neighborhood. Every one I've seen was written by the same attorney's office, none mention anything related to mineral rights, and each one references in bold the rights conveying are "fee simple". This is one of a few custom builders in the area so it's unlikely every builder is doing this. Either this is the only one in the area that's having rights severed, the attorney is an idiot and just missed it in every one of these contracts, or there's some sort of collusion with builder and attorney to keep things under wraps. I have a call out to the sales agent to find out what I can and plan to contact the lender afterwards to let them know what I've found.

Could I just say according to the contract the rights conveying are less than fee simple, but appraise it with the hypothetical that full fee simple rights convey?

 

[hastalavista]

Could I just say according to the contract the rights conveying are less than fee simple, but appraise it with the hypothetical that full fee simple rights convey?

No, you cannot do that (assuming this is for a mortgage finance intended use).

 

[SwampFox]

No, you cannot do that (assuming this is for a mortgage finance intended use).

How would you handle this?

 

[hastalavista]

How would you handle this?

I'd follow Restrain's advice:

...Comments about the presence or severance of minerals were such that we had canned comments (production, etc). In addition, the proximity of production and the ability of a driller to gain access to the property, impact for potential drilling activity, etc all can affect properties, primarily acreage developments.

In your instance, if the minerals are not producing, and there is no activity, a simple comment should suffice.

So-
1. I'd describe the situation regarding the subject's fee simple rights vs. the comparables.
2. I'd call some of the agents/brokers involved in the sale of the comparables and ask them if the buyer/seller was aware of the potential mineral rights included in the sale and if this had any impact on how the property was priced and purchased.
3. I'd research to see if there was any active mining/drilling occurring.
4. Assuming the buyers/sellers of the comparables didn't know or care about mineral rights and assuming there is no on-going (or anticipated) activity, I'd then comment that
a. at the present time, there is no indication that differences in fee were considered by the market participants, and
b. there is no current drilling/mining activity or any such activity planned, therefore
c. there is no market evidence that differences in fee affect value as of the effective date of this appraisal.

I'd document the research I did in the report.

Good luck!

 

[Terrel L. Shields]

With mineral rights severed, am I now appraising something other than the fee simple interest? "Fee simple surface rights"? If this is now less than fee simple, how would I appraise since this is not something I've ever seen disclosed and I could never find a comp with similar interest conveyed?!?

Since you don't have a check box for "fee in surface" (which is what you have), I would either X or * the Fee Simple box and then explain that the mineral rights are severed, and the property being appraised is only fee in surface. Then explain that there is no production in the area (assuming SC isn't exactly oil country) nor mining and no development is anticipated sufficiently close to the property to impact value. They may come back for more info, but there isn't much else to go on. I have never seen a lease where drilling will occur within 200' of a dwelling is allowed therefore only when a house is built AFTER a well is constructed would that be likely and unless you have an awful big lot, there simply isn't room for a drill rig...any horizontally drilled well could be a mile away or more.

You might be surprised to find that any number of properties have such mineral reservations. In non-oil or coal country, typically they are so ignored, people don't even know they don't have the entire "fee simple". An EA or an HC are likely unnecessary and could actually be confusing.

Note the pump jack in front of cedars is ~ 50-75 foot from the garage of a house, 150- 200' or so from a barn

 

[Meandering]

Here they severed many for coal rights,
but coal rights don't give them rights to gas and oil.

Check your state laws about mineral rights, if they are all the minerals including gas and oil, or just specific ones.

.

 

[Terrel L. Shields]

Marion is correct. In PA, possibly other states, "Mineral Rights" are separate from "Oil & Gas Rights"... most states I have worked in do not make that distinction.