My wife and I, who are both retired, inherited a number of mineral rights in 2022 and we have been receiving royalties from four companies, Phillips 66, Citation Oil & Gas, Koda and Continental Resources since that Inheritance. We are wanting to purchase a new house and would like to include these royalties along with our other sources of income on the loan application. While we can document every single payment since 2022, the loan company is requesting, in addition, copies of the applicable lease agreements “in order to document that payments will continue for at least 10 years.”
Is there any way for us to get copies of the applicable lease agreements? If so, where might we get them? Has anyone else ever dealt with this issue? Is there another method to adequately document our royalty income other than 1099’s?
Several things. First, the oil and gas lease(s) will only continue as long as there is production. Second, production decreases over time and revenues can only stay the same if oil and gas prices rise to cover the reduced volumes. Otherwise royalties decrease. Third, on the good side, new wells could be drilled and with the increased production there will be increased royalties. Loan companies want stable and provable income and that is very difficult to promise with royalty income.
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Agree with above mentioned, you cannot depend on your royalty to be the same each month and better to plan for them to decrease drastically. Your best bet is to wait on a house you can afford with your income and put all your royalty money in an S&P 500 index to grow an avg of 10 to 13% a year or find an investment group to join that needs capital in return for a flat rate%. For example, land investment capital groups offer 10% return. Take your oil and gas money and invest it in anything better than a savings CD etc.
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You may be able to get the lease copies from the operators for free. They should also be filed at the courthouse. Depending upon your state, they may be online. (Loan companies are not usually familiar with the oil business and don’t understand that you would not be getting royalties if the operator had not verified that you have a legitimate lease.) The Division Order might be sufficient.
As the others said, no guarantee for ten years of income. But if you have the Enverus Energy Link product to get your statements , those four companies are listed there. You can get a ten year prediction of the royalties from your current wells(not sure if the free version does it). Wells will normally decline in volume as the pressure depletes and prices fluctuate, but no one has a perfect crystal ball.
A relative of ours has used royalties several times to buy a house. They had a petroleum engineer run the numbers and the loan office accepted that. The Directories tab above lists Pecan Tree and Vass as appraisers (last time I looked). Pecan Tree does west of the Mississippi and Vass does east.
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Thanks, Martha. Yes, I was going to say the best way to support it would be reserve report showing the proved producing cash flow forecast. It’s not 100% certainty, but the hurdle is supposed to be >90% confidence in eventual recovery being able to meet or exceed those volumes. Agreed that no one has a crystal ball, and I also agree that most banks probably don’t understand any of this (unless they’re a Midland bank or something where half the folks there have delt with it). I’m surprised even how many Houston banks have no interaction with oil and gas dealings. Getting some expert to agree in letter/report form that “these values have a decently good chance of continuing” is usually the extent of comfort they can understand.
But also, yes, it’s never guaranteed to continue. However…my mind has been shifting a smidge lately after going through many home refinance and loan processes myself. Having the money up front to use as needed is a nice option for flexibility, and, with some folks, a job could have just as much instability as a producing well…and those are used to support loans all the time. It’s all about the full picture of risk and what YOUR appetite is for it and if that lines up with the bank’s.
I don’t think I can mention companies that aren’t on the directory here, but there are some newer companies starting to offer mineral lines of credit for mineral owners. I’ve looked into at least one in good detail (including many calls with the founder) and so far at least that one is passing my sniff test. Always be careful what you’re signing when dealing with anything related to a lien and your royalties.
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