NEW YORK (MainStreet) – In many parts of the U.S., house hunters face an unfamiliar and daunting issue: how to evaluate a real estate purchase when the seller retains the rights to recover oil, gas or minerals that lie in the ground below the property.
Texas and some other oil-, gas- and coal-producing states have long allowed property owners to separate surface rights from rights to what lies underground (such as oil, gas, or minerals, known in the industry shorthand as OGM). Now phrases like “OGM rights to be retained by seller” are cropping up in real estate listings in places like Pennsylvania and New York, thanks to new hydro-fracturing (called “fracking”) technology, which is used to recover natural gas locked in shale.
How can the prospective buyer evaluate such a clause? Unfortunately, there is no easy solution. A mix of federal, state and local laws govern OGM rights. Then come provisions negotiated between landowners and firms that lease the right to exploit underground resources.
Generally, these leases give those firms the right to come onto the property to dig or drill, even if the owner of whatever exists above ground doesn’t want them to. Typically, OGM operations must remain a minimum distance from dwellings, water sources and wetlands, and there may be laws restricting noise, dust, hours of operation and truck traffic, but operations can still be very disruptive, and after extraction ends, the land won’t necessarily look the way it did before.
If you are house hunting in an OGM-recovery area, keep some key things in mind:
The lease. This governs the relationship between the owner of the OGM rights and the mining or drilling firm. Ask to see it before offering to buy. Remember that if the seller retains the OGM rights, he or she can sell them to someone else, so any oral promises are worthless.
Research your rights. Don’t rely on your real estate agent, who may not be an expert in OGM rights and who will have a financial incentive to see the sale completed even if the terms are not in your best interest. You may find information through a state department of natural resources or environmental protection, a state university or environmental groups.
Beware comp sales data. Home shoppers generally assess values by looking at recent sales prices of similar properties nearby. In an OGM area, you cannot assume that sales prices in these databases included the underground rights, nor can you be sure the rights are worth the same on two pieces of land, even if they are the same size. A property should be cheaper if it does not come with OGM rights, but there’s no easy rule of thumb on how much cheaper it should be. Look for a local assessor who really understands how these rights affect property values.
Check with your lender. It may be tougher to get a mortgage on a home in an OGM area, even if the rights come with the property. That’s because there is a good deal of worry about how drilling and mining could damage water supplies and natural beauty, undercutting home values.
Hire a lawyer. Even if you have bought and sold several homes and feel comfortable going it alone, the OGM issues are so complex it pays to run any home purchase past an attorney who knows the subject. In addition to legal fees, you might have to pay for an appraisal of underground resources, water testing and other safeguards. Costs could get very high if you run into a dispute with the owner of the OGM rights.
In some areas, land prices are rising fast with the enthusiasm over new-age gas drilling. But if you won’t receive the OGM rights, there’s no point in paying any premium for the property.