Check for the physical functionality and conditions first i.e buttons are working well, no cracks or sign of open back covers, screen sensitivity, speaker working (play some songs if available), camera and stuff like that. Then check the software part i.e setting, wifi signal (try to connect to a hotspot and surf just to make sure the wifi working), cell signal (put in your own sim and try calling someone), Serial Number match from back cover with the one in setting or box (if have one and like Hanxz said) and errrr what more aaaa? The rest is up to you. It would be even better if you have someone that know about iPhone to tag along with you.

After you satisfied with all that only u give that person the $moolah$ (better COD la). The first thing you should do after acquiring the phone, restore the phone (to clear old setting and start fresh) and jailbreak/unlock yourself. If you do not know how to do that, you know where to ask.

Better start with a fresh phone rather than a phone stuffed with garbage that you don't know off. You can get those apps back from installer but the cracked ones ... umm .. well ...

NO!

You can read the thread below starting from post #8 regarding the warranty. Even the 2nd gen iPhone warranty is not that flexible to where we can claim it.

http://forum.lowyat.net/topic/741187