Update: A judge dismissed the lawsuit against Grant Cardone on October 4, 2023. Click here to read more about the decision.
Entrepreneur, author, and real estate investor Grant Cardone is facing legal trouble related to his social media marketing tactics, which has implications for other syndicators who double as social media influencers.
What’s It All About?
A class action lawsuit filed in Los Angeles Federal Court alleges that Cardone, who showcases his lavish lifestyle on social media, misled investors with promises of high returns while failing to disclose the risks of investing in his real estate fund.
Although Cardone included legal disclaimers on his website, the suit argues these weren’t sufficient, given the exaggerated nature of his boastful claims. An example: “You’re gonna walk away with a 15% annualized return,” says the former salesman in a 2019 video. “If I’m in that deal for 10 years, you’re gonna earn 150%. You can tell the SEC that’s what I said it would be.” Cardone goes on to say, “They call me Uncle G, and some people call me Nostradamus, because I’m predicting the future, dude. This is what’s going to happen.”
The suit is brought by Christine Pino, who is proceeding with a claim brought by her deceased father, Luis Pino, in 2019. Luis Pino invested $5,000 in a Cardone Capital real estate fund after attending one of Cardone’s 2019 “Breakthrough Wealth Summit” events. Though the case was initially dismissed in 2021, an appeal reinstated the case in 2022.
Cardone was able to solicit investments from his social media following directly, thanks to Registration A+ offerings, which were signed into law with the JOBS Act of 2015. These small securities don’t require as much oversight as traditional offerings and enabled Cardone to appeal to everyday people with as little as $1,000 to invest.
Cardone then used the pooled capital to purchase undervalued properties with large loans and drive up rents, taking up to 20% of the profits along the way. Meanwhile, residents of the buildings dealt with rent hikes and poor maintenance, The New Republic reports.
Cardone’s confidence may have garnered millions of social media followers, but the lawsuit says his statements were materially misleading and omitted essential disclosures, violating the Securities Act of 1993. Cardone’s habit of overpromising continued even after a warning from the Securities and Exchange Commission (SEC) in 2018 about his social media marketing material, the suit argues.
The Lure of Real Estate Influencers
U.S. Appeals Judge Barbara Lynn, who allowed the Cardone case to move forward, wrote, “Pino fairly alleges that the nature of social media presents dangers that investors will be persuaded to purchase securities without full and fair information.”
That danger is becoming widespread as more real estate influencers leverage their followings not only to sell educational material but also to lure investors to buy into their funds. They put their own wealth and success on display and imply (or directly promise) that anyone can build wealth by following in their footsteps. For example, influencer Kris Krohn makes the following claim to potential investors who partner with him: “Multiply your wealth 27X faster.”
But handing over money to real estate syndicators comes with serious risks, which real estate influencers often fail to explain on social media, even if they are running legitimate businesses. Analysts now predict that many of the thousands of real estate syndicators will default on loans with floating interest rates due to the Federal Reserve’s rate hikes and the pressures of inflation, The Wall Street Journal reports.
That’s what happened to Jay Gajavelli’s company, Applesway Investment Group. Gajavelli was a YouTube personality whose company became one of Houston’s largest landlords after he built an empire buying rental properties with capital collected from small investors and upgraded the units to increase rents, much like Cardone’s scheme. Those investors lost millions when more than 3,000 of the company’s rental units in four complexes were taken in foreclosure.
Cardone himself posted a video in March 2020 telling his followers he feared bankruptcy. He later deleted the video and claimed it had been a joke. He continues to solicit funds from new investors, but his empire rests on debt. There’s a risk he’ll lose too many tenants with his poor management practices and face too much financial pressure when the interest-only period on his loans comes to completion.
But some real estate social media influencers aren’t just overly confident about their funds’ potential return—they also face accusations of fraud. Clayton Morris, who used his social media following to sell rental properties to out-of-state, newbie investors and charge up-front rehab fees, is accused of running a Ponzi scheme with his business partner, Bert Whalen, in multiple lawsuits. Many of the 700 houses they sold were never repaired or sat vacant, while Morris and Whalen used fake leases and other tactics to deceive investors.
Even novice investors just looking for coaching or education can easily be scammed by real estate social media personalities. An FTC lawsuit against a real estate investment training company, Response Marketing Group, LLC, resulted in a $16.7 million judgment earlier this year. Response Marketing held free events across the country to persuade real estate investment hopefuls to purchase training and coaching programs costing as much as $30,000. However, most customers did not even recoup the cost of the program.
How Investors Can Protect Themselves
Promises of high returns on social media that sound too good to be true are most likely not going to be good opportunities. But even real estate syndicators who don’t post pictures of their exotic sports cars or claim to be clairvoyant can be bad actors, and even those who seem relatively transparent, honest, and straightforward can lose your money. That’s why due diligence is essential before investing even a small amount of money in a syndication deal.
You’ll want to evaluate the following:
- The team’s experience and company background: Check with the SEC to make sure the company isn’t fraudulent. Run a background check on the company to identify any regulatory action or bankruptcies. Assess the team’s years of experience with real estate syndication and make sure at least one of the partners has invested through multiple market cycles. Finally, evaluate the company’s social media presence and the transparency of marketing materials.
- The investment strategy: Look for syndicators who aren’t relying solely on investor capital but instead have some skin in the game. Get details about locations, asset classes, property management plans, and methods of generating returns. Run market comps to see if the strategy is viable and make sure the projections aren’t inflated. And ask about exit strategies for several potential scenarios that could impact the success of the fund.
- The company track record: Look at past deals for a track record of success. If any past deal didn’t achieve the syndicator’s projected returns, examine how they dealt with the outcomes.
- Past clients’ viewpoints: Check online for complaints from previous investors and ask for direct references.
- The investment fees: Look at acquisition fees, management fees, and other sponsor fees to ensure they are reasonable. Make sure that projected returns are presented transparently, accounting for fees.
- The legal documents: You might want to have an attorney look over the legal documents the syndicator provides before signing.
- The communication: If a real estate syndicator is opaque about answering your questions, that should be a red flag.
The Bottom Line
Cardone is a prime example of a real estate investor who rose to fame by showing off his good fortune on social media. His personal wealth inspired confidence in so many novice investors that he was able to move on from selling online courses to pooling money and securing large loans for rental properties. His future success hangs in the balance due to the lawsuit against him and the financial pressures he faces.
The lawsuit should serve as a warning to investors who hear claims of outsize returns on social media. Real syndication opportunities exist, but investors may need to evaluate dozens of deals before they decide to fork over funds.
And even with the best opportunities, it’s important to understand the risks. Prepare for potentially unfavorable circumstances with a diverse portfolio of investments so you can weather unexpected failures.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.