How to Price Risk in Real Estate Deals Like the Big Family Offices | Kent Petty

Kent Petty (00:00)

over the years I’ve learned to appreciate the brutal truth. I’m not offended by it. and I would say this, and you can deliver it and also receive it with grace. It doesn’t have to be a hammer. It can be, hey Quentin, we tried, it didn’t work. I appreciate your effort. I probably didn’t do enough here either. It’s probably time for us to go our separate ways. Or

Listen, you’re really good at this. It is a white space for me. I need you, and you’re about to renegotiate with me and I’m okay paying it.

Quentin Edmonds (01:05)

Hello, everyone. Welcome to the Real Estate Pros Podcast. I am your host, Q Edmonds, I’m excited to be here today. I’m excited about my guest. he has 20 years of experience with the big institutions, right? He saw how they maneuver when wealth, when things was up, when things were down. and that kind of

Gave him information to build an infrastructure that’s really helping people and letting the common man kind of get in on some of these bigger deals. And I love how he’s laid things out, how he’s built infrastructure, built systems. And we’re gonna get into that. And y’all know this is what I love. I love being able to learn from other people, learn from their experience, glean from their experience. And so this is gonna be good, chucked full of knowledge. I wanna introduce you all to Mr. Kent.

Petty Mr. Kent, how are you doing today, sir?

Kent Petty (01:55)

I’m doing great. Thank you, Quentin. That was far too kind. I am the quintessential common man, I’ll tell you that. So I really appreciate being here today. Thank you for taking time.

Quentin Edmonds (02:04)

Well, absolutely. But ordinary people do extraordinary things every single day. I think the extraordinary starts with just the ordinary, the common man, right? Having a vision, having a dream, and then just working to make that dream come to fruition. And so I’m loving that you are the common man. I’m loving it because I know you’re doing extraordinary things. And that’s me sucking up to you a little bit, but also me and being real at the same time. so I thank you for your time. Thank you for being here. You’ll hear me say this probably again.

I’ll value your time. I know how podcasts work. you come on as a guest and all that blah blah, but still, I value your time because your time is very valuable and the things you have to say is very valuable. And so thank you for being here. And Mr. Kent, I’m the type sir. I love to just dive right in, right? So I would love for you to tell the people what’s your main focus these days. If you don’t mind, give us a little origin story, how you got into the space that you’re in, and then tell them

markets you’re operating in, where you are, where your business is in. People love to know where people are geographically. And so Mr. Kent sir, you have the floor, my friend.

Kent Petty (03:11)

Okay, thank you. I appreciate it. Well, just by way, I’m in Austin, Texas, which is enemy territory. I actually played football at Texas A&M and my dad played here at the University of Texas, so we’ve got a big family rivalry. A lot going on there. I tried to play a little bit after college, I wasn’t good enough. I ended up in Denver, went back, got my MBA, and then worked for the big banks on Wall Street, the old JPMorgan Partnership, one Lehman Brothers’ spin out companies and AIG through the financial crisis. So

I think where I am today, Quentin, and by the way, I’m always learning and continuously trying to get better and improve and keep my ears and eyes open. And as we said earlier, I love to be in the bridge building business, not the bridge burning business, because you never know when you got to walk back over them. So fast forward to the last 10 years. what we found, me and several of my partners at Net Equity Capital

What we have found is there are small little groups across and we primarily operate in the southeast. So kind of Texas, we call it the Southern Smile or the Southern Corridor, primarily through the Southeast. There are small groups that have spun out of institutions and big banks in different places, whether it’s family offices or really experienced professionals that we’ve been

able to work with, work alongside, and learn a lot from. And that has been our thesis. And what we do is we partner with large family offices, we partner with former institutional grade investment and operators, and we take small little pieces of their deals for us and our friends because we are regular guys. we can’t meet these $10 million or $20 million thresholds for some of the deals they do. So we aggregate our money.

with our LPs and our friends. We get to sit alongside them. We get to learn and grow. And then also we get to use their resources and knowledge. It would be like me calling you Quentin and saying, hey, we’ve got a really neat deal up in the DC area. I don’t know anything about DC. You and I have done three industrial build to suits together over the last couple of years. Quentin, who’s the best operator? Who’s the best in class there? And so

What we’ve been able to do is expand our ethos and our network in the areas that we really like. And we do some single family home development, affordable housing in the Rio Grande Valley here in Texas. we’ve got a new governor that is from the Rio Grande Valley, so we’re hopeful that she understands that we’re trying to help and roll our sleeves up there. But we’re also looking at industrial situations for some of these large logistics and operators that kind of

maneuver around the data center world, not directly in, but adjacent to, along with some apartment redevelopment, not new construction. And then obviously we work on some land situations. So those are the things that keep us excited and going right now. And I would just say, for those of you that are interested in real estate or starting to get into real estate and want to roll your sleeves up and get your hands dirty and participate.

Finding a mentor, finding a group, finding a community like you have here with your Real Estate Pros um is critical, especially early, to really build that foundation and that safety net as you move through and really garner your passion and your expertise with whichever lane you decide to go in. so we’re excited about that for everybody and we sure do love the business.

Quentin Edmonds (06:40)

Yes, sir. But it’s gonna be a common thread. I see, I’ve said this a couple of times, so eloquently said. ha ha, I appreciate you say that.

now, people, y’all get the math on this. this gentleman is 34 years old, but he has 30 years of experience. I told you I’m kissing up a little bit, but you have 30 years of experience. you’ve seen a lot of different things, right? And so I always

Say, Mr. Kent, destiny has no wasted moments, right? We are learning from every leg of our journey, from the failure, from the success. we have literally sometimes carved out our lane because we tried things and it hasn’t worked. So we know that doesn’t work, but this has worked. And so things sometimes just fall into place. And so I would love to know from you, sir. 30 years of experience, you’ve been doing things for a long time. What has the journey

revealed to you about yourself? Has it made you more disciplined, more humbled, increased your tenacity? Tell me a little bit about what the journey has revealed to Mr. Kent.

Kent Petty (07:35)

it’s a great question. And it requires me to look back and think about some of the things that didn’t go right for myself and my partners. And I think getting humbled in deals and thinking and doing and trying to do too much on our own without asking for help and not knowing how to navigate things when things go bad or go wrong or go sideways or go slow.

I think those things can be expensive lessons. I think all of us in our world are optimistic. We’re always glass half full. We want to do the next deal. We think the next deal is gonna do this type of return and it’s gonna take this much time. and my dad used to say, it always costs more and takes longer. And so I think really being realistic about, hey, listen, Quentin and I can go out and

do 10 fix and flips or we can buy some land and do some land development or put some containers on an Airbnb. We can do some of these kind of fun little projects together, but are we really pricing the risk? Because he and I have to go to the bank. We’ve got to PG the loan. We’ve got to sign for it. We’ve got to put our money in. And then we got to maybe go find some money from some friends and family and pass the hat. We’re on the hook with them. We’re on the hook with the bank and maybe we can get a 30% margin on the deal if everything goes right.

Well, I’ve tried those and I’ve done those, and some of those have been spectacularly great. and some of them have not been good. And you’ve had to go back to the bank with your tail between your legs and really take it on the chin and financially and otherwise. and it does humble you, Quentin. It does. It makes you reassess your situation. It makes you reassess what real risk is. And I would say this to anybody either getting started or even if you’re a seasoned professional.

you have to know how to price risk. And risk is not just financial risk. It’s reputational risk. It’s also deal risk. It’s theta decay for those of you in the bond market, theta is time. You have to understand time is money and speed to market and all these things. And one of the things that we have learned and that has humbled me is when we do partner with some of these large multi-billion dollar family offices and we watch how they underwrite deals.

And we watch how they have access in real bank relationships to get loans that so for plus one ninety, where I’m in there trying to get something that’s not a 10 or 11 or 12. And if I can get something in the nines, I’m in good shape and they’re in the fives. And you have to give up a little and show a little ankle so they can go do the deal. sometimes that humbles you and it also puts you in your place to know, These are experts.

I want to ride alongside these experts. I want to learn as much as I can, make a nice return, and then maybe go step out myself or maybe partner with them on a JV situation down the road. So I think being humble and knowing what we can and can’t do and our limitations, I’m 57 years old. there’s a lot of things I can’t do anymore, but I certainly can look at deals, try to assess real risk. And I would say this to anybody.

If you pencil out your worst case or your base case or a case that’s not very good and you still are okay with that, that’s the key to moving forward on a deal. And not like, hey, if everything goes good and Quentin and I hit our targets, we’re gonna make X. And if it does better, we’re gonna make two X. But if somehow we miss it, we get rents the whole deal, then you that X and two X don’t look so good anymore.

Looking at the numbers honestly and knowing about pricing of labor, pricing of materials, what kind of financing is really available, do you take more leverage or more equity in a deal? I think those things for me on a going forward basis have allowed me to sleep at night knowing that I’m more realistic there. And that’s a humbling experience because I’m pretty good at this. markets are moving. You and I have got it.

Midas touch Everything we touch is gold. And you can fall into that trap. And I have as a lot of people have. I’ll wrap this up. I grew up in Dallas. my wide receiver in high school is the CEO of Wells Fargo Bank now. His name’s Kyle Hranicky He runs their entire commercial bank. Kyle and I are still good friends. When we talk, he talks about the ’08 crisis and he talks about COVID and when things go bad, he says, You know Kent?

Our borrowers and the people that we really stayed with were the people that communicated, let us know what was going on and were honest about the situation. The people that hid under their desk and didn’t return our calls and threw the keys back, we won’t do deals with them anymore. And I’m not speaking for him, I’m saying in general. I think the communication, if things are not going well, for me to raise my hand and say, Hey Quentin, we got a real problem here. These guys walked off the job.

We can’t make payroll. Material prices are high. Somebody’s getting ready to lien the deal to have that communication and be humble enough and be serving enough to the project and the deal instead of your ego getting in the way, I think will allow you to navigate those things that are even tough and have those tough conversations. So those are the things the people are more important. The money runs out before the deal’s due. There’s plenty of deals.

But the people and the way that you operate with them, I think, really should be more of the underwriting and when things go bad, who are you in the boat with and who’s rowing the boat with?

Quentin Edmonds (14:14)

Man, we’re gonna talk about it more about relationships and community, but the last couple of lines you said, it makes me think about community, makes me think about relationship. I always say, at the foundation of any sustainable business is servitude. So making sure that there is a connection, a real connection with people is paramount. there’s a proverb that I quote quite often that I got from a proverb from scripture. It’s Proverbs 11:25. It says, “When you refresh others, you in return will be refreshed.”

So when you find yourself in a situation where you’re refreshing others, somebody’s gonna come back and refresh you. It’s kinda like this circle of motion that kinda happens. and I heard you say my wide receiver. So that means you was a quarterback, Mr. Kent? Did I pick up on that?

Kent Petty (14:56)

In high school. I wasn’t very good, but every year I get better. Ask me next year and I’ll be all conference and everything else. So my Aggies are having a tough year this year, but what are you gonna do?

Quentin Edmonds (15:04)

Yes,

sir. Absolutely. Well, I love the way you just get practical knowledge. I’m gonna kinda continue with the theme of just making things simplistic, keeping things practical, and talk a little bit about operations and systems. from your perspective, what’s maybe one operational thing that you’ve put into place, let’s say maybe like the last year, that has either changed the way you do business or has built on the success of your business. So give me one operational thing that has really helped you succeed.

Kent Petty (15:31)

I think my partner Mitch is a CAIA, which is a Chartered Alternative Investment. It’s kinda like a CFA but for alternatives. he codes and does some interesting things with the computer. I think the implementation, not the overwhelmingness of AI, but I think the implementation of some of the tools that we’re able to use in our underwriting, in our deal summaries, have really prompted us

to look at things through a different lens. remember the old Excel files. You would build your Excel model, you would look at the past performance, you would put pro formas and cash flow analysis out in a deal. I think some of the AI tools that we’ve built into our models. And by the way, I would encourage you or anybody listening, if they’re looking at a deal or if they’re

thinking about a deal and have some number. We’ve got a group that does all our analytics for us. it’s our own proprietary deal grading system that we use at NetEquity Capital that happy to share. It doesn’t take us very long. We get it to our people. So that’s something that we would offer anybody that is like, hey Kent, we’re looking at this deal. these are the numbers and help. So I think

implementing some of the technology. We use InvestNext as our back office that does a lot of stuff. Some people use Juniper Square, some of these other groups, cash flow portal. InvestNext has been real good with us kind of systematizing and organizing our back office and all the different KYC, K-1s all the different diligence pieces. But the AI component, I think, for folks in our vintage who are older folks

I think we’ve done a pretty good job. I’m proud of where we are implementing that. Does it make our decisions for us? Does not take over anything else we do, doesn’t replace feel and relationships and historical things that you’ve done with different groups and operators, but it does give us a different lens and it really allows us to step back and say, Hey, listen, we didn’t really think of it in that way and that helps our underwriting.

Quentin Edmonds (17:28)

Love it, as you were talking, I couldn’t help but think, what’s next? you accomplish a lot, but what’s the next real goal? What are you looking to solve at scale next, Mr. Kent?

Kent Petty (17:37)

I think that the next thing that we’re doing is we’re launching a fund called the Red State Alpha Fund. And it’s not a political fund. It just happened to be. We’ve done about ten years of research and almost thirty thousand transactions. We’ve got working papers and white papers out on our website about it that shows some of the policymakers and some of the different things that states and local and city governments can do.

to be pro-real estate investment. And we looked at the four major asset classes, office, industrial, retail, and multifamily. And we found out that if you get into these areas and are investing in these specific areas over the last 10 years and 30,000 or so transactions, you’ve been able to garner about 4–4.5% of additional alpha every year. And that’s meaningful. If long-term

returns are 10 and the bonds are at five, four is forty percent more. So we’re launching a fund. we’re seeding the fund right now and what we do is we partner with developers and groups in those areas that are building and working on projects and we invest alongside them in these areas that are pro real estate around the country. we’ve got press releases out. my partner was just interviewed

on Fox Digital and we’re on Morningstar and all the different groups, Yahoo Finance. So we’re really bullish about wanting to operate in business friendly environments. the DC area is a really good example. the permitting in and around Virginia and Maryland in different areas can be cumbersome. certain parts of Texas we have real

tight restrictions on permitting and getting things done. It causes deals to lag and go over budget. And by the time you deliver something, it could be a completely different market. So those are real risks that we look at. So that’s what we’re really excited about kind of going forward is identifying these areas, partnering with some of the best in class groups and deploying capital and our LPs.

Quentin Edmonds (19:39)

Yeah, love it. So I’m gonna absolutely love asking you this question. So everyone that comes on, I ask them and I told you I’ll circle back to this, their unique perspective on the word relationship. And so everybody sees relationship differently, have been exposed to relationship differently within business. So Mr. Kent, what is your unique perspective on the word relationship, relationship building from all aspects, maybe client, peer-to-peer.

mentorship. what is your unique perspective on the word relationship?

Kent Petty (20:11)

I think

over the years I’ve learned to appreciate the brutal truth. I’m not offended by it. and I would say this, and you can deliver it and also receive it with grace. It doesn’t have to be a hammer. It can be, hey Quentin, we tried, it didn’t work. I appreciate your effort. I probably didn’t do enough here either. It’s probably time for us to go our separate ways. Or

Listen, you’re really good at this. It is a white space for me. I need you, and you’re about to renegotiate with me and I’m okay paying it.

So understand the relationship and the value of the relationship, it doesn’t always have to be monetarily. It doesn’t always have to add up by numbers. There can be a lot of things that a mentor or someone who you’re working with, a coworker, a partner, or even an investor, just the brutal truth, full transparency.

Hey, listen, this deal’s not going like we thought it would. There’s a lot of things that we could do better on it, and it starts with us. But here’s some of the other factors, and we’re going to try to mitigate and work through those, but we appreciate you staying in there. having those tough conversations, I think, is the most important. And also having those great conversations and celebrating those wins together. all of those things are important. don’t dismiss how hard it is for us to extract real returns from this business.

This business is brutal and it can turn on a dime. And you’ve got to be in the boat, rowing with your partners. when we do deals, Quentin, a lot of the things we do, we call them shoulder to shoulder. They’re either a sidecar deal or a shoulder to shoulder deal or a co-investment deal. if we’re taking someone else’s capital, our money hunts the same way your money hunts. we don’t get paid till everybody else gets paid.

and I know a lot of these waterfalls and GPLP structures and we do some of that too, but we are very cognizant today that, time and money and other people’s resources are very precious to them. we look at the three pillars, faith, family, and finances. And faith and family are your personal situations. Those are for you to run the way you need to run them. Finances, we all keep the same score.

The money means the same to everybody in the sense of dollars count the same, one dollar in, So that part of it we try to help with the most and say, hey, listen, whether you’re a $50,000 or $100,000 investor with us, or you’ve got five million dollars in three of our family office deals, it all matters the same to everybody. And when you’re young, you don’t really think that way. you answer the five million dollar investor before you answer the $100,000 investor. We don’t do that anymore.

we can’t afford to do that because you have to be up front and those tough love talks, whether they’re with your kids or with your business partners, I think just brutal truth and full transparency and just rowing the boat together really really mean the most.

Quentin Edmonds (23:05)

Yeah. man, it’s two things that come to mind with what you just said. So one is a quote by Brené Brown are you familiar with Brené Brown? So listen, I’m remarried, been married for four years. I

Kent Petty (23:17)

Congratulations.

Quentin Edmonds (23:18)

that. I appreciate that. I actually almost won my wife with this line. We was talking.

I was interested in her. I thought she was interested in me. That’s a whole nother story. I found out later on that she was actually interested in another guy at the party.

Kent Petty (23:32)

your due diligence process is terrible, Quentin. We’ve got to work you. we’ve gotta put you through.

Quentin Edmonds (23:37)

I dropped this line from Brené Brown “Clear is kind. Unclear is unkind.” The kindest thing that I can be is straightforward to you. That’s the kindest thing that I can be. So I love your approach to no-BS straightforward. and you talk about being in the same boat. I always say relationship is a ship. We’re in this ship together and we gotta relate together who’s gonna row the boat, who’s gonna stay, who’s gonna be the captain. But we’re in this thing together. If this ship goes down.

I love your approach to relationship. I love your approach to being straightforward. Mr. Kent, I feel like we are just scratching the surface. I really feel like I could talk to you about so many different other things. but I’m gonna be diligent without time. If someone wanted to reach out to you, connect with you, collaborate with you, learn more about what you’re doing, how can they get in contact with you, sir?

Kent Petty (24:28)

I think the best way would be kent@netequitycapital.com is my email and then Net Equity Capital is our website for our real estate group that my partner Mitch and I have. So you can reach out that way. we’ve got love to hear from everybody and just let know what they’re working on, some of the things that we’re working on and just really be collaborative. Happy to help.

Quentin Edmonds (24:50)

Absolutely love it. Let me say three things to you sincerely, Mr. Kent. One, thank you for your time. I value your time. I think time is our most precious commodity. Thank you for that. Secondly, thank you for the gift, and I say the gift of your authenticity, your integrity, and even your vulnerability. I believe when we show up as ourselves, we cast seed out there, and people can take that seed and plant it in their situation.

And get a yield in a return. So thank you for just showing up as your authentic self and casting some real seed that allow people to plant it if they want to. I appreciate that. And lastly, sir, thank you for your mindset, your unique perspective, your unique processing. Thank you for that and bringing that to this platform. I greatly appreciate you coming on today, sir.

Kent Petty (25:34)

Thank

you for having me. Thank you, Quentin.

Quentin Edmonds (25:37)

Absolutely. So listen, y’all heard Mr. Kent. His information is in the show notes. Please get in contact with him, but definitely make sure you’re subscribed here because I promise you we’re going to continue to bring up amazing people, just like the Kent Petty. So, sir, I say thank you again. And everyone else, y’all have a fantastic day.