Sharga shares why the current market is different from the one that preceded the 2008 housing crisis.
What is caveat emptor?
Caveat emptor is a Latin phrase that translates to “let the buyer beware.” It’s an implicit warning to a buyer that the property she is purchasing may have unforeseen defects, which puts the responsibility on her to do due diligence before closing the sale. As long as the seller tells the truth about the state of the property, he’s protected from liability if the property doesn’t meet the buyer’s expectations.
Caveat emptor, commonly used in real estate deals, applies to everything from large corporate contracts to small private transactions. Because the seller usually has more information about the product than the buyer, the buyer should become reasonably informed before making a purchase.
A buyer may remind a seller of caveat emptor by describing the property as “sold as is,” implying potential defects. However, it’s in his best interests for closing the sale to be as thorough as possible. In theory, he need not say anything more than “house for sale,” but the buyer would be making a poor decision to buy the home based on that alone.
As a principle of contract law, a buyer has no recourse to damages if the seller doesn’t misrepresent the property. Say someone is adopting a puppy from a shelter. With the concept of caveat emptor in mind, she might ask if the puppy’s had its shots or has any behavioral problems. The responsibility falls on her to get the clearest picture of the puppy’s health before taking him home.
Caveat emptor doesn’t apply in situations where the wrong good was received, if the good doesn’t work as advertised, or if defects are intentionally concealed. In those cases, the seller must remedy the situation or he could face a lawsuit.
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Caveat emptor example
Ernest is selling a pair of baby shoes, which he advertises only as “never worn.” Following the principle of caveat emptor, that’s not enough information for a buyer, who also wants to know what material they’re made of and what size they are, to make sure her baby daughter can wear them. After buying the shoes, the new owner discovers that while they fit her daughter, they have, in fact, been worn, and requests a partial refund from Ernest.