In a recent discussion among professional appraisers on the Gems and Jewelry Discussion List of the American Society of Appraisers (ASA), some participating members questioned whether automated diamond appraisal such as we offer at e‑Praise.com is ethical or even possible. We were delighted and gratified to read the following authoritative contribution by Mr. Larry Phillips, MGA (Master Gemologist Appraiser), immediate past International President of the ASA and former Chairman of the ASA Gems and Jewelry Committee:

Hi, All,

...

So on to the larger question - is this type of appraisal ethical? The answer - according to both USPAP and ASA ethics is "yes" - provided that the client is not misled and the results are credible and based on sound appraisal research and analysis techniques. There is no requirement that the appraiser actually examine the property. An appraisal can ethically be based on sufficient available information obtained from another competent source. The more accurate and complete that information is, the more accurate the appraisal will be. We all do a version of this every time we make an insurance estimate on lost or stolen jewelry - but then we are usually working with even less information.

...

The real property appraisers have been confronting the problem of "Automated Valuation Models" (AVMs) for decades. Business valuation appraisers use many of the same techniques used by AVMs as a matter of course in analyzing income properties. Tax assessor appraisers working with both real estate and machinery frequently use AVMs and similar methods. In the greater appraisal profession, AVMs are sometimes feared by appraisers. For example, single family residential appraisers are steadily losing ground to competition from the AVMs. Many banks use AVMs in deciding whether or not to make mortgage loans on small to medium size houses. In many arenas, however, AVMs are respected tools of the profession.

The basic idea behind an AVM is exactly what Merv [Mervyn L. Cohn, ASA, of e-Praise - ed.] is doing. It takes available information from a known (and presumably reliable) source and applies a mathematical algorithm based on a database of prices or sales records. There is ample diamond price data easily available (at least for the wholesale and auction markets). Granted, the major laboratories may vary somewhat in the accuracy of grading and the completeness of the proportion information provided. But it is still reasonable to rely on the diamond grading information supplied by these labs because most of the jewelry industry already does so. Finally, there is published information regarding average mark-ups for ranges of quality and price in various markets (e.g., Jeweler's Circular Keystone) that can be used to adjust the wholesale and auction information to a retail level.

While the above might be pretty impossible to apply to other gemstones or most completed jewelry, diamond grading is considerably more uniform and less subjective. Nearly any truly competent jewelry appraiser with a little penchant for programming could design a reasonably good algorithm for diamond prices.

The key is (as always) disclosure. It is necessary to disclose that the property was not personally inspected by the appraiser and to describe the potential impact of any value characteristics that might be "missing" from the information in the lab report. It is necessary (as always) to describe the methodology employed in research and analysis in creating the algorithm. It is necessary to indicate how often the database is updated or when this was last done. It is necessary to disclose any assumptions made in analyzing the data and indicate the degree of reliance the client can place on the value conclusion. All of the above are requirements imposed by USPAP. Of course, in a professional report, all other USPAP requirements should be met as well.

USPAP Standard 6 (Mass Appraisal, Development and Reporting) specifically addresses the USPAP requirements for this type of appraisal work and specifically applies to both real property and personal property. I haven't seen the e-Praise work product, but provided that it fulfills all USPAP requirements and its results are credible and not misleading, there is nothing unethical or unprofessional about it. In fact, application of legitimate mass appraisal methods to diamonds is a professionally innovative and creative idea.

...

Thanks for listening,

Larry

(Excerpts quoted with permission; emphasis added)

Mr. Phillips teaches Uniform Standards of Professional Appraisal Practice (USPAP) principles. He is an Appraisal Standards Board Certified USPAP instructor and a member of the ASA Personal Property and Gems & Jewelry Faculties.- ed.