Appraisal Est. Retail Value vs. Actual Price Paid

[jesrush]

Question for the experts out there ~ Why do appraisers consistently over-inflate diamond values on the appraisal??

I can''t tell you the number of times I''ve heard people exclaim happily, "Diamond appraised at 130% of what I paid for it!!!" and that sort of thing. My own .78ct H/SI2 appraised at $1200 more than I paid, when clearly my diamond could be replaced for approximately the same amount I paid for it.

I heard one explanation that appraisals from the seller are just trying to "make you feel good," but even 3rd party disinterested appraisers seem to over-inflate so that really doesn''t explain it. Very Curious! Thanks!

-J

 

[denverappraiser]

jesrush,

There are certainly appraisals that are about fluffing up the price to make you feel good but there are actually good reasons that even legit appraisals will come in higher than what you've paid.

The problem is in defining the term value. Any sensible definition must contain a statement not only of "what is this worth?" but also answer the questions "to who?" and "when?" (among other things). These things can make a tremendous difference in the value conclusion. "How much should I expect a high end retailer to charge for a ring that looks like mine?" could easily be boild down to "what is this worth?". Similarly, "what could I expect a pawn shop to give me?" has the same fundamental question of "What is this worth?" It's an equally valid question that would yield a very different answer. This is the reason that good appraisals come with so much extra paperwork. All this extra paper explains what market was researched, how the research was done, what assumptions have been made and other information that is necessary for the value conclusion to be meaningful.

In the case of insurance replacement appraisals, the purpose of the appraisal is to provide information to properly fund a policy that will replace an item with another one of "like kind and quality" in the case of a loss. This replacement is supposed to occur in the "usual marketplace". In most cases, this means a local retail store. The insurance company will send you to a local jeweler with whom they have established a relationship to get your replacement. The jeweler will arrange for the piece, charge you the amount of your deductible and charge the balance to the insurance company. Most such jewelers agree to work on a cost plus basis. This is actually a fairly expensive method and can easilly cost more than you paid, especially if the jeweler has to custom make the replacement using local labor and materials. This often happens, for example, in the case of a single lost earring that was manufactured by a company who is no longer in business.

The secret is to be sure that both you and the appraiser understand what question you are asking and what his/her answer means. Otherwise, the answer is useless. "What is this worth?" is simply not a specific enough question.

I hope this helps.

Neil Beaty GG
www.gemlab.us

 

[Richard Sherwood]

As Neil points out, the majority of appraisers value items at an "average retail replacement value" for insurance purposes. This is an average value purchased through the venue most consumers use, the traditional jewelry store.

It doesn't make sense to appraise everything at very low prices if only a minority of consumers use venues that would allow them to purchase at those prices (internet, very competitive b&m's, "second story" operations & "wholesale" retailers). An appraiser would only usually appraise at this level if asked specifically by the client.

If you don't want an appraisal at traditional retail pricing, just ask the appraiser to give you a conservative retail figure which he feels comfortable with. This will ensure that you're covered in the event of loss, without overpaying on insurance premiums.

With internet customers I've begun adding additional information on a "critique/consultation" segment of my report. On the appraisal portion, I value the diamond at a traditional, albeit conservative, retail replacement value. Then on the critique/consultation I give estimates for the market value of the diamond on two other levels: "low traditional (sale) retail" and "expected internet (or competitive b&m) pricing.

Then the internet customer can see what their diamond would cost at traditional pricing, sale pricing, or competitive b&m/internet pricing, and decide whether they are paying a fair price or not. If they then request I make the final value at a more conservative figure I usually recommend the "low traditional retail" figure, as the "competitive b&m/internet" pricing is often too low to cover the individual over the next 3 to 5 years (the recommended time for an appraisal update).

 

[wonka27]

Rich -

That is a pretty cool thing you do. I'm sure your clients appreciate it! It is so interesting how one item can have so many values. I guess that is true of other luxury and collectible items.

 

[Richard Sherwood]

-----------
It is so interesting how one item can have so many values. I guess
that is true of other luxury and collectible items.
-----------

It's true of most anything. You can buy a lamp at a high-end full-service department store for $90, while the same lamp might only cost you $60 at a low-end serve-yourself department store.

You can buy a KFC chicken dinner for $4.99 that will cost you far more at a full service restaurant.

You can buy a camera new over the internet significantly cheaper than what it would cost you more at BestBuy or Circuit City.

Etc, etc, etc...

 

[oldminer]

An appraiser really needs to discuss the various markets and mark-up levels with their clients. Without the ability to do this one must revert to average retail replacement which will be higher that Internet prices on diamonds.

Three important things to keep in mind:

1. The appraiser must be very careful not to come in at a price any lower or the client will be most unhappy and it may cost the vendor a sale for no good reason.
Since the appraiser is usually in the dark about the actual price paid, it would dangerous to rely on just guessing exactly right. We can't do it that perfectly.

2. The vast majority of consumers want an inflated, "feel good" figure not so much because they are naive, but because they have become accustomed to it. Many of them think it is an absolute requirement that their jewelry is worth far more than what they paid for it.

3. Independent, "disinterested" appraisers are part of the problem, as you stated in the posting above. We are part of this because of the public and trade's expectations. There is very little call for reality in appraising and a very strong demand for average or inflated prices when less would be sufficient. Insurance companies love it. They make more money on premiums. Retailers love it as it makes them look like heroes. Consumers love it because they "feel good". Appraisers "love" it because it keeps all the parties in a state of ecstacy. or so it would seem.

Truthfully, it is high time to begin to correct this nonsense and save the money wasted on insurance. You can feel good about being told the truth and about saving insurance premiums. If this happened, we'd soon see the rate per hundred dollars for insurance rise. Insurance companies look at the bottom line and base premiums on costs and profits. If they take in less premiums the rates will increase over time. Honesty is the best policy and as soon as people demand it, they will get it. Will everyone like it? The jury has not yet decided.

For years we have offered what we call "Discount Retail Replacement Value" and Deep Discount Retail Replacment Value" on reports in addition to regular "Retail Replacement Value". The first is about 15 to 30 percent off full retail. The second is about 15% over what we feel is wholesale cost. Any less than 15% mark-up when dealing with an insurance company will be a huge problem. 15% mark-up is really not enough to be safe or comfortably insured, but we let well informed or opinionated clients make their own minds up on this. We inform, they decide.

Very few clients choose either lower mark-up options. They choose the feel good approach in nearly every case. I believe they should be free to do so. It may be silly, but I see no harm in making yourself happy if you can aford it and it does not harm anyone else.

 

[strmrdr]

Id request a number that is purchase price + 30% for the appraisal.
That will hopefully cover a few years of DeBeers price increases.
To insure it for purchased price isnt the right answer either.
Remember that DeBeers has raised prices to the tune of 8% plus just this year.
Someone needs to take them down hard and let the market decide price but until that happens expect yearly price increases and get enough insurance to cover them but not to much more and keep an eye on the market.

I asked a local jewler about the high appraisals and one of the excuses he used was that most people never get anything reappraised and by making it high he is making sure they will have enough insurance down the road.
He has a slight point.

 

[jesrush]

Neil, Rich, Dave, & strmrdr thanks for your informative responses!

The three points you made that resonate most with me are:

1) That most consumers purchase via traditional B&M jewelry stores--so the replacement values appraisers give must be tied to those B&M prices--not the lower internet prices... especially if the insurance company might try to replace your lost stone using a B&M.

2) That the appraisal must allow for Debeers yearly price increases. I suppose getting the stone re-appraised every few years would keep your stone current with Debeers prices (and inflation). However, you could get screwed *in between* appraisals if your last one didn't overinflate the value a little bit.

3) That the appraiser doesn't want to unknowingly value a stone lower than the actual price paid, and unnecessarily alarm the buyer.

In conclusion, it sounds to me like *some* moderate inflation by appraisers is actually a wise idea after all. That said, Dave, I think I agree with you that it's getting out of control and probably needs to be reigned in a little bit! It's disheartening though, to think insurance companies might manipulate their rates to compensate for lower appraisal values...

-J