Ask the previous owner if you can contact their vet to get current information about the dogs health - if they say no, walk away.
Talk about the dog intesively with the owner, find out as much as you can, and ask to go for walks with the dog to see how they interact if possible.
To protect yourself, just write up a contract highlight medical issues, behavioral issues or whatever you think you need to protect yourself with. End with ( previous owner) relinquishes all rights to (dog in question)

I suspect your biggest problem with obtaining a pet directly from an owner is that if it didn't work out they might not want to take it back. You need to get answers to that situation right up front. I'm not talking breeders but a family pet. You really want honesty and folks who are trying to find homes for a pet they can't keep or don't want have a reason for looking for other placements. They may or may not hide a problem, depending on how desperate they are. I think vet recors, as Mazer says is the first place to start.

I vote for finding a dog through Freecycle or through the classifieds. You will save lots of money and still be giving a dog a home that would have ended up in one of those shelters.

As far as taking an animal back when it doesn't work out, does anybody really do that?????? That is just plain cruelty to the animal who certainly doesn't want to go back to a cage.

Nobody said anything about a cage. My DD and husband just took back two puppies when the new owner felt that the puppy issues were too much. The pups were from a dog they took in who was abandoned and pregnant. They wanted any pups who did not work out to be returned, so they'd know they could be carefully re-homed. Dogs aren't always mistreated in their original home, but sometimes come from circumstances like I mentioned. And a responsible pet owner who finds themselves with pups through no action of their own, will want any pups back who aren't fitting in. If somebody gives/sells you a dog and won't take them back, then I'd suspect less than a good situation that they came from.

Thanks everyone... here's how this particular situation played out... the owner wanted $2000 for this dog that she's owned for about 6 months - that's the original ASKING price (not the "bargain price I actually paid") plus all vet bills incurred since getting the dog (spaying, shots).

The dog in question was a "designer dog" from a breeder in the Midwest whose web site showed dog after dog after dog for sale. I smelled "puppy mill" and the faint whiff of "scam" somehow...

So I walked.

Susan