Appraisals That Won’t Backfire on You

If one of your appraisal clients is having difficulty with an insurance claim or trouble with taxes because his appraisal wasn’t performed professionally, you can bet he’s not happy. If he’s angry enough to take legal action, you might be facing some costly trouble of your own.

How can you keep clients happy? First and most important, get some formal education. In fact, we’ll be blunt: Get training or don’t do appraisals. The field is strewn with legal land mines and is no place for the unprepared. Fortunately, training is available from a number of organizations (see box on p. 136).

Second, take the same care producing your appraisals that your benchworker takes creating a piece of custom jewelry. Approach each assignment step by step, asking yourself a series of questions as you go along. We’ve listed them here for you:

Intended Use: What is the appraisal for? Why might a client need an appraisal? Most likely because he’s getting insurance. Or, he might be making a charitable donation or figuring estate taxes. Why should you care? Because the intended use dictates the type of value you’ll use in the appraisal. Choosing the value correctly—that is, in a manner that’s supportable in court—is the single most important aspect of appraisal.

We were consulted on a situation in which the client used an estate tax appraisal—with no statement of intended use—to obtain insurance coverage. The jewelry was lost, and a claim resulted. Settlement was nearly impossible because the insurance company found the appraised value too low to replace the item. The client is considering litigation against the jeweler who wrote the appraisal.

Purpose: What type of value should you use in the appraisal? An insurance appraisal is based on replacement value (the most common type of value in jewelry appraisal), which is the actual retail cost of replacing a piece of jewelry—not an inflated value used to close a sale. If an item is not replaceable, use the values of similar pieces to arrive at the appraised value. In the case of a one-of-a-kind piece, the value may be the cost of duplication.

Any appraisal written for IRS purposes must use fair market value, which is the value at which a property would change hands in its most common market. If the jewelry is new, fair market value will be the same as retail replacement value. If the jewelry is 20 years old, fair market value is likely the price it would bring in a pawnshop.

What is the market level? To write a professional appraisal, you must understand the jewelry market and recognize where different types of jewelry are bought and sold. Obviously, only Tiffany can make a Tiffany solitaire—you won’t find one in a discount chain. So appraising the value of a prestige-name solitaire at the price of a discount-chain solitaire is inappropriate. Avoid comments such as, “I can get a piece like that for…” A person who owns a Tiffany solitaire ring enjoys the prestige associated with the brand and is entitled to have her ring replaced with another Tiffany in case of an insurance claim. Thus, it’s essential to identify the piece as available only from Tiffany. For any appraisal, always specify the market level.

Method of Valuation: Which do you use? Two methods of valuation are common in jewelry appraisal. With the cost method, you determine a value by assessing the cost of materials and labor. (You do not weigh the piece and apply a formula that provides a value or cost of replacement.) With the market method, you research the selling prices of similar jewelry.

Values must be supportable. That is, you must justify in writing the method you choose. No one should have to contact you to understand how you arrived at a value.

Dates: Have you listed two? A professional jewelry appraisal has a date of examination and a date of valuation. Dates allow you or another appraiser to address the client’s concerns about value in the context of the jewelry market at the time the appraisal was written.

In estate appraisal, the IRS requires that the date of valuation be the date of death or another legally specified date. In situations involving the IRS, follow the agency’s instructions.

Are there “limiting conditions”? If the stone you’re appraising is mounted, that’s a limiting condition. We recently encountered a client who refused to take her ring off. That’s an extreme limiting condition. Both situations hinder your ability to evaluate. To protect yourself, state such conditions in your appraisal. (Or decline the work. That’s what we did. The alternative would have been a document stating, “We guess that the stones are diamonds, but we’re not sure because the owner wouldn’t let us examine the ring.”)

What do you affirm as the truth? What are your appraisal ethics? The certification, which you sign, states either that you have no interest in the items being appraised or that you sold the items from your inventory. It stipulates that you weren’t paid to provide a predetermined value. The certification affirms that you examined the jewelry and states whether you are accredited. You can find wording for the certification in a publication called Uniform Standards of Professional Appraisal Practice (USPAP), recognized by Congress as the source for appraisal standards. We advise you to use it.

When appraising an item you sold, don’t be tempted to state a value higher than the price at which you sold it. It’s unethical and likely to result in excessive insurance premiums for the client.

Is your description adequate? Provide a detailed description of the jewelry and pay special attention to condition and workmanship. Grade stones for color, clarity, and cut and estimate carat weights. Plot important stones and note details of proportions and finish. Describe mountings in terms of metals, construction, dimensions, and weight. Note how stones are set and the quality of workmanship. Note loose stones and porosity. State provenance and the date or period of manufacture.

Have you explained how you arrived at your figure? A narrative explains how you estimated the value. It should outline the process that led to the result. The significance of the jewelry dictates the amount of detail in the narrative. Important jewelry, such as a ring from Harry Winston, requires more detail.

A good narrative demonstrates that you didn’t guess. A guess is difficult to defend in court.

Appendices: What’s a VS2, anyway? Federal Trade Commission guidelines require that you explain any grading system used in your appraisals. And clients need to know the standard used to evaluate their jewelry.

Caution: Beware of using store-specific grading scales. Failure to use known systems indicates a lack of product knowledge and unfamiliarity with the jewelry trade.

Did you list your credentials? A professional appraisal requires that you state your identity and credentials. The minimum credential, a Graduate Gemologist diploma, qualifies an appraiser to identify and grade gems. But the Graduate Gemologist course doesn’t include appraisal training, which an appraiser must have. An appraiser must be competent in evaluating metal work, because the condition of metal affects the value of jewelry.

Estimating value by plugging Rapaport prices into an arbitrary formula results in inaccurate appraisals. Proper training shows you how to research value by a method acceptable in a court of law.

The terms “certified” or “accredited” mean that the appraiser is retested periodically or maintains a specified level of education over time.

Are you aware of your liabilities? As an appraiser, you present yourself as a jewelry expert, and you’re obligated to live up to the expectation that creates. You’re responsible for performing a competent, professional, ethical appraisal supported by research. Other responsibilities pertain to confidentiality, fiduciary obligations to third parties, agreements and contracts, and so forth. USPAP is an excellent source for specific information about appraiser responsibilities.

Here’s a final tip: Avoid oral estimates of value. You are held to the same liability for a spoken estimate as for a written appraisal.

This page from a professional appraisal shows dates of valuation and inspection, the client’s name, and a full description of the ring, including stones, metal, weights, and measurements. There is also a narrative as well as photographs of the ring.

Name: Jane Client Date of Inspection: July 20, 1999

Date of Valuation: July 22, 1999

Type of Jewelry: Ladies Art Deco-era platinum, emerald, cubic zirconia & diamond ring

Metal(s): Platinum Markings: None

Method of Manufacture: Fabrication

Dimensions: Top: 8.70 mm wide, 5.00 mm high Bottom: 1.70 mm wide, 1.09 mm thick

Weight: 3.9 dwt. Size: 7 1/2

Type of Setting: Emerald and cubic zirconias are set in semi-bezels; small diamonds are bead set

Number and Type of Stones: 1.35-ct. emerald 2) approximately 6-mm round faceted cubic zirconias 24) 0.015 ct. to 0.02 ct. each old-style single-cut diamonds, VS clarity H-I color, all exhibiting fair cut; total diamond weight is 0.42 ct. All stones graded while mounted. All weights estimated by formula.

Condition: Fair to poor: Emerald is heavily abraded. Bezels are worn and there is a crack in the shank.

Workmanship/Quality: Very good: Engraving and piercing are skillfully executed.

Finish: High polish with hand engraving

Description: Ladies platinum Art Deco-era ring set with a hexagonal step-cut emerald at the top center. There is a cubic zirconia bezel-set on each shoulder. The CZs appear to be replacements of the original stones. The bezels of the CZs and emerald are pierced in a scroll design that is bead-set with single-cut diamonds and millegrained. The shoulders are bead-set with single-cut diamonds and pierced out in an “X” design. The shank is flat and tapers. The ring is circa 1920.

Narrative: This is a type of item that would most commonly be purchased through estate jewelry dealers and estate jewelry auctions. Sales of this type of item are strong due to the current interest in jewelry from this period. This is the market in which the item has been valued. The current retail replacement value (comparable) was estimated using comparison with similar items in the marketplace. The current retail replacement value (comparable) of the item is $7,655.

Retail Replacement Value (comparable) as of July 22, 1999: $7,655.00

Photographs of Subject

This is the sum total of an “appraisal” that will backfire on you. It describes a 4.50-ct. diamond. There is no date, no plot, and a huge grade range. The “appraiser” didn’t tell us the shape of the stone or sign the report. When we valued the stone, our replacement value was $30,000.

4.50-ct. diamond set in gold mounting. I clarity G to J color …….. $82,000.00