What is Caveat Emptor?

Definition: Caveat Emptor (buyer beware) is a legal principle that places the due diligence burden of a transaction on buyers. It means that the person making the purchase is responsible to make an informed decision.

What Does Caveat Emptor Mean?

The phrase caveat emptor comes from the Latin and it means “let the buyer beware”. It is a legal term implicitly involved in a sales transaction, where the buyer has the unilateral responsibility to research the product or service properly to make sure it fits all his requirements. Any difference between expectations and actual result can’t be blamed on the seller, according to this principle. This is a rule that normally applies in free market transactions, with the exception of illegal situations where the seller has acted in bad faith against the customer’s interest.

This principle has been softened by legislation that aims to protect consumers from potential market misconducts. These laws often provide safeguards that must be supplied by businesses, either through sufficient disclosure of information or elements attached to the products like warranties. In the real estate’s secondary market, caveat emptor is assumed. The buyer has the sole responsibility to perform the proper due diligence before the purchase, assuming, of course, no wrong doing is being done on the seller’s side.

Example

Mr. Bill is currently reviewing options to buy a new home. He has a pre-approved mortgage of $350,000 plus $120,000 he had saved. He decided not to hire a realtor, since he has some experience in the real estate market. He already has 5 options that he must review carefully before closing a deal.

One of the houses, had great indoor spaces but had a leakage problem in two of the bedrooms. Another one, was located in a great neighborhood but the point of access to public transportation was very far away, which is no good to him. Finally, he decided to buy a house of 540sqmtrs that is close to where he currently lives. He knows he have to make an informed decision and make all the necessary due diligence before making the purchase, since the transaction is assumed to be caveat emptor.