The vast majority of people in the oil business are good and honest people. If you looked around, the lion’s share of companies who buy and sell mineral rights royalties are fine and upstanding businesses.
Unfortunately, the saying “One bad apple can spoil the whole bunch” isn’t a cliché by accident either. As much as it pains us to say it, some of the companies who purchase mineral rights royalties do not have the mineral owner’s best interest at heart.
The good news is once you know the tactics you can spot them from a mile away.
So let’s talk about some of the common pitfalls that can come up throughout the process. Because your family’s livelihood and legacy are two things you don’t want to lose over two misplaced words in an agreement.
Here are 5 tactics that we’ve seen all too often over the past 30 years.
#1: Mineral Acre vs. Royalty Acre
Many people who own mineral rights royalties are surprised to learn that mineral acres and royalty acres are two completely different things. Since this is a common misunderstanding, some brokers take advantage.
If you get an offer from a company be sure to clarify which type of acreage they are interested in buying from you. Look for any inconsistencies in their language, both written and over the phone.
Upstanding companies are consistent in their language. The offer will be clear and easy to understand. The ones you have to look out for switch back and forth to make it sound like they’re only buying your royalty acres when, in fact, they’re taking your royalty interests AND your mineral interests.
It’s a neat little trick that works out well — for them. You feel like you’re not giving up as much, and they get far more than you ever suspected you were selling.
Don’t be afraid to raise questions along the way, or walk away from a deal if something doesn’t feel right.
#2 The Bank Draft Trap
Don’t get too excited if you get a bank draft in the mail for your minerals. It is not always smooth sailing from here on out.
“Deposit this draft and we’ll talk about buying your mineral rights royalties later” sounds enticing, but it should stop you dead in your tracks.
Once you deposit the draft, you are legally bound to sell your minerals. All of your leverage is out the window. You can’t re-negotiate. You’re stuck.
If you’ve read the ‘fine print’ and feel comfortable with the terms, that’s a different story. But don’t head to the bank until you know the whole story, which can be buried if the wrong company sent the draft.
#3: The Mineral Rights Royalties Bait & Switch
The bait and switch is as old as business itself. You’re offered one thing up-front, and then given something totally different at the signing table.
Brokers who introduce themselves and pitch you right away should send up a red flag in your mind. Again, “We’ll make you an offer of $50,000 cash today” sounds wonderful.
But how did they arrive at that figure?
What due diligence has the company done to justify that offer? Have they done business with your neighbors? What kind of reputation do they have, online and offline?
This is not to say you can’t get an offer from a reputable company quickly. We perform valuations and offers with precision. But the offer is not where we start.
We do our homework, and so should you before you sign on the dotted line.
#4 Not Getting Fair Value
Sadly, it’s not uncommon for companies to give offers that are far lower than what your mineral rights royalties are truly worth. Yes, every business has to make a profit, including Ilios Resources.
However, the gap between “fair market value” and the offers some mineral owners walk into our offices with can be astounding.
Don’t rush into anything. Get more than one offer. Consult a trusted professional who knows your market. Do a little market research. Which is just a fancy way of saying it’s always a good idea to talk to your neighbors.
It’s rare when you’re the only person on the block who got an offer. Put your feelers out there and make sure the comparables aren’t an exaggerated tactic to get you to sell.
#5 No Due Diligence
We alluded to this before, but it bears repeating. Don’t pull the trigger with any company who hasn’t done their due diligence.
Contrary to popular opinion, big companies aren’t always bad. There are several in the mineral rights royalties space who do outstanding work.
On the flip side, there are some who treat you more like a number than a person whose family’s future could be riding on this transaction. Some don’t have a big enough local footprint to have a good idea of what is happening on the ground.
These companies might mean well, but it’s hard to pay your bills with good intentions.
This conversation isn’t only restricted to big companies. Small companies can get lazy and attempt to cut corners along the way just as easily as the big guys.
Whether big or small choose someone who knows the infrastructure, the daily happenings, and the history of your area.
Slow and Steady
Mineral rights royalties transactions are complex by nature. But you can always tell a great teacher by how straight forward they can make the most complex ideas.
You will be amazed at how simple this business can become with just a little due diligence. Know your options and stand your ground.
We started with a cliché, so we might as well close with one.
Slow and steady wins the race. Every time.
Now it’s your turn. What advice would you give to a mineral owner who just got an offer letter in the mail? Let us know! Please leave a comment below!