Caveat emptor: Let the buyer beware!

Caveat emptor in property- a key principle which property buyers would be very wise to take heed of.

Caveat emptor is the principle of property law which controls the sale of property after the date of a deal closing

Back where I grew up in the Old Dart (that’s England, by the way, if you are English and don’t know what the heck I’m on about…), caveat emptor was one of the key consumer laws, although it has since been superseded for the purchase of most consumer goods by the Sale of Goods Act 1979, whereby a consumer has the right to a full refund for faulty or damaged goods in most circumstances.

Regardless of all that, any buyer of property should pay great heed to the principle.Delete "MISTAKE"

If you buy, for example, a house which has structural issues or an apartment which has a strata fund plummeting towards deficit and you have failed to do your due diligence, you may have no legal right of redress.

Property purchases are often the most material transactions we undertake in our lifetimes and therefore undertaking full due diligence ahead of any purchase is of the utmost importance.

Caveat emptor: Let the buyer beware!

Caveat emptor in shares

[sam id=35 codes=’true’]Although you may only hear of the big glossy brochure offers like the Queensland Rails and the Myers of the world, replete with their Jen Hawkins photos and colourful charts and graphs, every month listed companies make announcements to the markets that they are to undertake capital raisings by offering shares at a discount “to sophisticated investors” which dilute the existing stock.

The very term “sophisticated investors” enrages those who are not offered to partake in the capital raisings and results in all kinds of anger, fury and abuse on the stock market chat forums.

The term isn’t meant to be derisory, however, it’s simply investment terminology which requires investors to have a certain gross income ($250,000 over the previous 2 years) or level of net assets ($2.5 million) under Corporations Law, these figures being certified by an accountant.

Once certified, sophisticated investors are able to evaluate offers of securities without the requirement for a regulated disclosure document.

Why?

Well, ultimately, why do securities exchanges exist? It’s an exchange or market where companies can raise capital and a place for securities to be traded.

So with no costly and time-consuming disclosure document to prepare, brokers can flog shares to sophisticated investors more quickly and more efficiently.

It gets things moving without the need for the laborious process of preparing a long-winded prospectus.

Caveat emptor: Let the buyer beware!

Looking at it differently

There was an amusing passage in one of the Rich Dad book series (I can’t recall which one), whereby the mythical ‘Rich Dad’ character and his son, describe to a woebegone young Robert Kiyosaki that because ‘Rich Dad’ is a sophisticated investor he is offered ALL the best investments and it is ILLEGAL for poor people like Robert to participate.

He’s a very clever writer is old Kiyosaki, and he knows exactly how to push people’s buttons!

Those who don’t qualify as sophisticated investors shouldn’t necessarily be upset, however – the sophisticated investor Corporations Law is there to protect them from risky investments, not to exclude the everyday Mum and Dad ordinary shareholders.

Robert Kiyosaki

In fact, you could argue that it is the sophisticated investors who should be wary!

Your rich, ‘sophisticated investor’ tagline could see you become a market whale – a target for hungry brokers to sell to you any old investment they can!

In my professional career I was involved in the preparation of a lot of these regulated disclosure documents and prospectuses. And I also was involved in plenty of capital raisings without prospectuses to sophisticated investors.

Looking back, it’s interesting how, especially as we have lived through a major financial crisis, plenty of the ‘amazing’ investments that were offered to sophisticated investors ended in heavy financial loss for the participants.

As for the open capital raisings, the real winners from disclosure documents tend to be the lawyers, the investment bankers, the bean-counters and auditors and the printing companies…

At the end of the day, being a ‘sophisticated investor’ means you will be offered plenty of investments by your broker. But you need to be careful that you actually are sophisticated and not just wealthy, or you could end of being badly burned and ‘relieved’ of your hard-earned capital.

Caveat emptor: Let the buyer beware!

 Short-term thinkingthinking

The biggest mistake I see people making on a day-to-day basis is short-term thinking.

People seem to almost exclusively focus on a plan which involves an asset going up in price in the short term which very much smacks of weather forecasting and often ends in failure with the investor (speculator) being back send back to square one.

Instead, the odds of success are improved immeasurably if you have a plan which involves continuing to acquire quality, income-producing, appreciating assets which you can hold for the long term…preferably forever.

Always due your due diligence before buying an investment and remember…

Caveat emptor: Let the buyer beware!

[sam id=29 codes=’false’]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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