Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide.
You’d probably be pretty angry if you bought a house only to find it’s full of asbestos or mold two days after closing. But could you take legal action? That depends on your state’s stance on caveat emptor -- a real estate principle that safeguards sellers after the closing date.
If you’re preparing to buy a property, make sure you understand what caveat emptor is and how it might affect your purchase.
What is caveat emptor?
Caveat emptor is a Latin term that roughly translates to "Let the buyer beware," and it’s a part of real estate law in several U.S. states. At its simplest, it means the buyer is responsible for doing their due diligence before purchasing a property.
If a problem is discovered on the property after the real estate transaction is finalized, the seller can’t be held liable or at fault. The exception would be if the seller actively tried to hide the property’s issue from the buyer (essentially amounting to fraud).
Many states have stopped enforcing caveat emptor -- at least in 100% of cases -- instead, requiring sellers to file disclosures with buyers before selling their properties. While there’s no hard-and-fast list of which states follow caveat emptor and which don’t, Alabama, Arkansas, Georgia, North Dakota, Virginia, and Wyoming are largely known as caveat emptor states. In others, courts have upheld the principle only some of the time.
What must a seller legally disclose (and what don’t they)?
Most U.S. states now require a seller’s disclosure form, often called "disclosure notices," "property disclosures," or "property condition statements." On these forms, sellers must advise the potential buyer of any material defect they’re aware of in the home -- usually within a few days of finalizing the purchase agreement or sales contract.
The exact items that must be disclosed by a seller vary wildly from one state to the next, but usually, anything that affects the home’s value or poses a health concern must be disclosed.
Here are just a few examples of things that a seller might be required to disclose:
- Known storm or water damage.
- Recent repairs or renovations.
- Noise or nuisances in the neighborhood.
- Crimes or deaths that happened on the property.
- Health hazards, like mold or pest infestations.
- Missing components (A/C, water heater, gutters, etc.).
- Pending litigation or boundary disputes.
You can find out the specific required disclosures in your state by checking with your state’s Realtor association. A local real estate attorney can also point you in the right direction (as well as provide legal advice regarding caveat emptor in your state).
Buyer beware -- and take precautions
Even if your state doesn’t regularly uphold caveat emptor, it’s important to do your due diligence anyway, especially if you’re buying a fixer-upper or a residential property sold "as is." If you’re buying a home you intend to rent out, it’s even more important. (You don’t want to end up liable if the tenant is hurt or their personal property is damaged.)
You should always get a professional home inspection and make sure to dig into property records, too. Is the title clean? Are there any disputes regarding boundaries or easements? Who owned the property before the current seller?
You can also consider additional inspections, like mold, pest, termite, and asbestos inspections. If the home has a special feature, like a septic system or swimming pool, inspections of these items are also recommended.
Finally, look into the neighborhood. Check out local crime rates, ask the neighbors for the inside scoop, and drive around at different times of the day. Get a feel for what the community is like at all hours.
Caveat emptor in commercial vs. residential real estate
The use of caveat emptor has been declining in residential real estate. In recent years, many courts have sided with the home buyer, especially when the non-disclosed defect leads to significant property damage or poses a health or safety risk. When it appears the seller failed to disclose a known problem, the seller can also be held liable.
In commercial real estate though, caveat emptor is as alive and well as ever. The court regularly rules in favor of sellers, and only in a few states are there seller disclosure forms required. Because of this, it’s critical that commercial buyers do proper due diligence before deciding to buy a property.
This might include:
- Conducting professional inspections of the building and its systems. This could include roof inspections, electrical inspections, HVAC inspections, and more. You might also want to bring in an architect, engineer, and other consultants.
- Reviewing the property’s records, including its past owners, title, deed, property survey, and other important documents. Make sure to look for past code violations, too.
- Auditing all current tenant leases and contracts, if applicable. Make sure to get an attorney involved in this step just to be safe.
- Having the property’s value professionally appraised. Your lender might require this anyway if you’re financing the property.
- Reviewing the property’s compliance with local zoning and land-use regulations. You may also want to check for ADA compliance.
- Having an environmental assessment conducted on the lot and the building. Are there any contaminants or environmental hazards? Are there hazardous materials in the building, like lead-based paints? You’ll also want to know if the property is in a flood zone.
If you plan to renovate the commercial property you’re buying, bringing in a contractor or consultant is also a smart move. You’ll want to assess the property’s condition as well as the potential repair costs well before you close on the building.
Caveat venditor -- or seller beware, too
The next time you sell a property, keep caveat emptor in mind, too. To protect yourself from litigation down the road, make it a point to over-disclose with the purchaser. Share any and all repairs, disputes, and renovations with them, and reveal any defects -- with the property, lot, or neighborhood -- even if they’re not currently causing a problem.
You should also consult a real estate agent or attorney, too. They can ensure you’re providing the legally required disclosures for your state and that you’re taking every step necessary to safeguard yourself (and your business) from potential liability in the future.
11% of the mega-wealthy swear by this investment…
The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.
If you, too, want to invest like the wealthiest in the world, we have a complete guide on what you need to take your first steps. Take the first step toward building real wealth by getting your free copy today. Simply click here to receive your free guide.