Buyers, Officials Digging Into Mineral Rights Issue

Builder D.R. Horton is catching heat for hanging on to mineral rights for homes it sells in the Raleigh, N.C., area.

The company, the nation’s largest builder, has been keeping the right to drill for natural resources under homes it sells nationwide for years. But, the practice recently caught the attention of buyers and state officials in North Carolina, which is considering legalizing “fracking,” a controversial drilling technique in which drillers use a high-pressure mixture of water, sand and chemicals to break apart energy-rich rocks. As the Journal has reported, fracking is behind the recent boom in U.S. oil and gas production, but there are concerns about its environmental impact.

The North Carolina issue, which is being closely watched by the local press, will undoubtedly be brought up by analysts during the company’s quarterly earnings call Monday.

In a fact-sheet distributed to reporters this week, Horton points out that it is not uncommon for real-estate sellers nationwide to sever mineral and surface rights.

In Texas, where Horton is based, home buyers and builders often don’t receive mineral rights since they can be retained by longtime owners. “It’s unheard of in Texas for you to get the mineral rights when you get a house,” said Eric Lipar, chief executive of LGI Homes, a Houston-based builder of entry-level houses.

Horton said it began reserving the mineral rights more than 500 feet below the surface back in 2007, “long before this latest interest in oil and gas exploration.” The builder transfers the exploration rights to subsidiary DRH Energy.

The terms give DRH “the perpetual right to drill, mine, explore … and remove any of the subsurface resources on or from the property by any means whatsoever,” according to the News & Observer.

Horton promises that “no extraction of minerals can take place except as permitted by state laws and regulations.”

Some lenders in North Carolina have been reluctant to grant mortgages on homes without mineral rights. D.R. Horton says it has accommodated each lender that has an expressed a concern on a specific closing. (Horton says that lenders in other states typically want to know that the surface has been protected by waiver or by regulations that prohibit drilling on a residential lot.)

The State Employees’ Credit Union, however, will not grant mortgages to homes without mineral rights, according to Reuters. “We’re concerned with the potential future damage to the property, the future marketability, and the concerns with the resell if the home doesn’t come with the mineral rights,” Spencer Scarboro, senior vice president of loan originations, is quoted as saying.

It is unclear why the issue has just now come up — and it’s possible drilling will never occur — but, according to the local press, Horton has complied with a request from the state Department of Justice to detail its disclosure practices. The builder says that it discloses the mineral rights reservation multiple times in the home-purchase agreement and as part of the title-insurance commitment and in the deed. The company also requires that buyers sign a disclosure prior to the closing.

Horton now says it “intends to require an additional disclosure in a separate written document to be signed by our buyers prior to contract.”

The company declined to comment further.

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