* Retains mineral right under many homes it sells
* North Carolina looks at disclosure to buyers
* Homebuilder says it has responded to the inquiry
* Reports earnings Monday
By Michelle Conlin
April 18 Homebuilder D.R. Horton Inc is
hanging on to the rights to drill for oil and natural gas
underneath many of the houses it sells, a practice that state
prosecutors are watching closely.
The drilling rights could give a lift to the largest U.S.
homebuilder, whose shares plunged when the housing market
crumbled. As energy companies find vast new gas deposits using a
controversial technique known as "hydraulic fracturing," mineral
rights are becoming increasingly valuable.
But the North Carolina Department of Justice is looking into
whether D.R. Horton's customers knew they were giving up their
rights to the oil, natural gas, groundwater and other minerals
underneath their properties, in perpetuity. The state Department
of Justice sent a letter to the Fort Worth, Texas-based
homebuilder last week requesting information.
D.R. Horton says it has responded to the request and
"provided them with our current disclosure practices."
The company said its practice is "to disclose the mineral
reservation to potential homebuyers before a sales contract is
executed. The reservation is also reflected to all homebuyers in
the owner's title insurance commitment, which is delivered to
homebuyers prior to closing, and in the deed delivered to the
homebuyer at closing."
The issue of who should own mineral rights is particularly
acute in North Carolina, where legislators have been debating
whether to open up the state to hydraulic fracturing, known as
In 2010, when the state legislature began looking at
allowing fracking in the state, D.R. Horton began including
language in its standard sales contracts reserving mineral
rights. It also retains the right to drill and dig tunnels,
shafts and wells, with no limitation, underneath the homes it
D.R. Horton sells homes that cater to first-time buyers. The
company is set to report earnings on Monday.
"I'm sure they will be getting a lot of questions about
mineral rights on the earnings conference call," said Stifel
Nicolaus analyst Michael Widner.
For D.R. Horton homeowners, fracking raises real concerns.
Financial institutions, for example, have been loath to grant
mortgages on homes within three miles of gas wells. Entire
neighborhoods could see their home values plummet.
The State Employees' Credit Union is one North Carolina
lender that will not grant mortgages to homes without mineral
rights, says Spencer Scarboro, senior vice president of loan
Scarboro says that one D.R. Horton sales contract got past a
credit union loan officer and an underwriter before a closing
attorney discovered the language in the sales contract about the
mineral rights. The credit union rejected the mortgage
"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," says
Fracking involves blasting a watery cocktail of sand and
chemicals deep underground to fracture rock and free otherwise
unavailable gas and oil.
As fracking has proliferated in states like Texas and
Pennsylvania, so has the controversy surrounding its use.
Critics of the technique warn that it can poison drinking
water, contaminate air, and pollute soil. Some scientists have
even argued that fracking has contributed to earthquakes. The
U.S. Environmental Protection Agency is currently studying the
public health and safety aspects of fracking.
Supporters of the process say that if it is done properly it
poses no environmental threat.
For many, fracking has turned the dirt underneath their land
into gold and has become big business.
In the past two decades, land men working for oil and gas
companies have fanned out across resource-rich states like
Texas, North Dakota and Pennsylvania. They have banged on doors
and persuaded homeowners to sign leases for their mineral
Those who hold out can sometimes garner thousands of dollars
an acre, plus royalties, according to homeowners in
D.R. Horton says it reserves mineral rights in the majority
of the areas where it operates. It then transfers those rights
to a subsidiary called DRH Energy, which is also based in Ft.
The two companies share a chairman, Donald R. Horton, and a
chief executive officer, Donald Tomnitz.