Caveat Emptor is a Latin phrase meaning “let the buyer beware.”
According to Merriam-Webster.com, “caveat emptor” is a principle in commerce that says the buyer assumes the risk of the quality or condition of the goods or services without a warranty.
The origins of the caveat emptor principle in law lie in a 1603 case, known as Chandelor v Lopus in England. A man bought a bezoar stone ( a lump of undigested material found in the gastro intestinal tract of some animals believed to be a cure for poisons) that was supposed to have healing properties. He realized later that the stone did not work as it was supposed to and sued the seller, asking for his money back. The courts ruled that “the bare affirmation that it was a bezoar stone, without warranting it to be so, is no cause of action.” In other words, the seller did not make warranties the product was a bezoar stone(financestrategists.com).
However, modern legal systems and market economies have provisions in place to ensure that buyer interests are protected during a purchase.
This principle certainly applies to the note business. I became very aware of this fact on one of the very first note transactions I worked on.
I was talking to a note holder who told me he sold a “home” and got $100,000 in a down payment. I was so naive at the time that I just asked a bunch of questions but asked for NO documentation to back up what he was telling me. I was working with an investor who lived close to the property, as I did. We decided to visit the property together, but before leaving, the investor looked at the property on line – I did not – and discovered it was an old “mobile home” – not a house. We canceled our visit and called the seller asking for a clarification. He explained that he used the term “home” to mean where a person lived, whether a house, apartment, etc. I then asked for a copy of the closing statement. The statement showed no down payment – the sales price and promissory amount note were identical. No $100,000 down payment. The note holder explained that he received the money directly from his buyer. The closing statement made no mention of $100,000 being received outside escrow. When I asked for proof he received this payment by providing a copy of a bank deposit statement, the phone went silent. He gathered himself and explained he used the cash to pay off debts, buy a car with cash, etc. My investor did not buy it and backed off.
Big lesson learned. Caveat Emptor. buyer Beware.
