Step 6: Appraising
Table of contents:
- The Traditional Definition of Value
- What is a Willing Seller?
- What is a Knowledgeable Buyer?
- Types of Value in Gem Appraisal
- Original Value
- Insurance or Replacement Value
- Fair Market Value or Estate Value
- Liquidation or Scrap Value
- Cash Value Insurance
- Why is Cash Value Insurance More Expensive?
- Value and Conflicts of Interest
The Traditional Definition of Value
Value is the price a willing seller and knowledgeable buyer can agree on.
What is a Willing Seller?
A willing seller implies a person free from duress. For example, if you need to sell something quickly to pay emergency medical bills, you would be under duress. In such circumstances, what you’re willing to sell for wouldn’t be a good indication of value.
What is a Knowledgeable Buyer?
Knowledgeable buyers know what they are buying. In our trade, the gem business, that means providing an accurate description and full disclosure of any treatments to customers. If you sell someone a one-carat diamond, it better weigh a full carat, not just 97 points. A natural sapphire should be a natural gem, mined from the earth, not a synthetic. If you fail to provide accurate information, your customers aren’t knowledgeable buyers.
Types of Value in Gem Appraisal
For appraisals, we need more refined definitions of value. Many people assume that a gem appraisal sets a definitive price for an item. Actually, the price depends on the type of appraisal done and can consist of four different types of values.
For example, say you’re the executor for an estate. It includes a 50-piece set of sterling silver dinnerware purchased in 1940 for $150. That figure is the original value, established at the time of sale.
Insurance or Replacement Value
Replacement value is the cost necessary to replace the appraised items. Replacements may encompass new items of the same kind and quality or similar items of the same kind, age, and quality. This definition takes into consideration wear and defects.
In most cases, the replacement item should be an exact replica. Therefore, a qualified craftsman using the same materials and construction techniques as the original should make the replacement. Of course, finding an exact duplicate for some gems or antiques isn’t possible. In these cases, you or your insurance choose something as close as possible, instead. Take that 50-piece dinnerware set, for example. In today’s marketplace, a new set of similar dinnerware may sell for $100 per piece. So, the replacement value is $5,000 for the set. This is the highest value you could place on the dinnerware.
Fair Market Value or Estate Value
Fair market value falls somewhere between the simple definitions of original value and replacement value. For example, an original value of $150 for that set of dinnerware from a receipt from 1940 is no longer relevant. By the same token, a $5,000 replacement value for a set of used silver dinnerware is too high. The fair market value would be a realistic price at which you could sell the dinnerware set.
The fair market value definition modifies the traditional definition slightly. The price a willing seller and knowledgeable buyer are likely to agree upon in their local marketplace is the fair market value. For example, you may find similar dinnerware sets currently going for an average of $50 per piece. This helps establish a fair market value for the set at about $2,500.
When appraising for fair market value, you would take into account a combination of factors, including:
- Recent auction records.
- Secondhand market information.
- Relevant price guides.
- Information from stores selling similar items.
Liquidation or Scrap Value
If you need to sell for quick cash, you need a liquidation or scrap value appraisal. For example, this is the value of that silver dinnerware set if sold quickly, without the time to research the best source or wait for an auction. This exemplifies selling under duress. (If a bankruptcy court forces someone to sell his or her goods, there may not even be a willing seller).
Under these circumstances, the appraiser multiplies the weight of the dinnerware times what a scrap dealer will pay for the silver.
Cash Value Insurance
In the event you have a piece of jewelry stolen and you’d prefer cash instead of a replacement, you’ll need cash value insurance. Insurance companies charge much higher rates for this. Therefore, it’s uncommon.
If you haven’t purchased cash value insurance and your insurer makes you a cash offer for a loss, it will be much less than the replacement value.
Why is Cash Value Insurance More Expensive?
Usually, an insurance company will direct you to a local jeweler who will make a replacement item for you. If you’re satisfied with the replacement, the jeweler will bill the insurance company for cost plus an agreed commission. The commission is typically a percentage of the jeweler’s costs and calculated on a sliding scale. The commission percentage declines as the value of the replacement increases. The jeweler may get 50% over cost for replacing a $1,000 item, but only 15% over cost for a $10,000 item.
Now you know why cash value insurance premiums are substantially higher. It costs the insurance company more than replacing the item. On a positive side, rest assured that when an insurer refers you to a jeweler, an experienced professional will handle your claim. However….
Value and Conflicts of Interest
Be aware that some insurance companies offer very low premiums by doing the replacements through companies they own. Since the insurance company, rather than an independent jeweler, determines what constitutes a fair replacement, a potential conflict of interest arises.
Other companies pay very minimal commissions and have very stringent rules and regulations. Jewelers who do replacements for these companies may not be willing to give you a fair replacement.
You’ll find important differences among insurers in quality of coverage and how they replace losses. For more information on choosing an insurance company, see Purchasing Jewelry and Gemstone Insurance.