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Jewelry at half-price? Well, kind of

You've probably noticed the ads, particularly if you are thinking about getting something sparkly for someone you love this Christmas. They promise that any jewelry you buy will appraise for twice as much as you pay for it. A Red Tape reader recently wrote to me and asked, "How can this be?"

Well, there's good news and bad news. Internet-based jewelry stores have really changed the economics of the tight-lipped jewelry business, leading to more choice, and more price transparency, which is always a good thing for consumers. On the other hand, Web jewelry sales have also opened up a whole new language to consumers, which invites the opportunity for word-play and potential confusion. That's what we have here.

Can you buy something from a jewelry store at half the price it's really worth? Of course not. Can you buy something and get it appraised at twice the price you paid or it? Yes, you can.

That doesn't make sense -- until you understand that appraised and market value are two very different things. Before you buy jewelry this holiday season, it's important for you to know how appraisals work.

Let's look at the promise made by The site's disclaimer page explains the firm's "Double Value Guarantee."

"We guarantee the retail value of all finished jewelry manufactured by the Jewelry Exchange and not requiring center stones or customization, that is priced under $3,000, to appraise for double the purchase price." The store goes on to explain what it defines as a valid appraisal and what the reward is for beating their claim (either a refund or a store credit for the difference).

How can Jewelry Exchange do this without going out of business? Before we explain what's going on, let's have jewelry analyst Ken Gassman demonstrate the best way for a consumer to assess such a guarantee.

"Any store which makes this kind of promise, tell them, 'Show me the money,'" he said. Ask the store if they will give you $6,000 if you buy the ring for $3,000 and sell it back to them, he said. Their answer will reveal a lot about the guarantee.

But notice, the guarantee says nothing about retail value. It applies only to an appraisal value, which is a different thing. And jewelers tell me the appraised value of an item often is twice the amount consumers pay in a discount retail shop.

Multimedia special report: A diamond's journey

Many appraisals are ordered to establish value for insurance purposes (some insurers require an appraisal), and they represent replacement value. Insurance companies are fond of planning for worst-case scenarios, so an insurance appraisal may take into account the actual cost of replacing an item at a full-price store five or 10 years in the future. The insurance firm likely won't have to pay that amount, but remember, a higher appraisal means a higher premium.

Meanwhile, a love-struck man who bought his girl a diamond bracelet and gets a high-priced appraisal will feel like a million bucks if he thinks the gift is worth more than he paid for it. So what's the harm?

Only worth what you pay for it

The harm occurs if that love-struck man gets the notion that the bracelet he just bought really is worth twice what he's paying for it.

Bill Doddridge, owner of Jewelry Exchange, said that never happens because his salespeople don't pitch the appraisal guarantee as if it's a retail price guarantee.

"(Jewelry) is only worth what you pay for it," he said. "We are not saying it's worth double."

Gassman said he was concerned that such a guarantee might confuse consumers, who rarely understand the nature of the jewelry business and the relationship of appraisals to retail price.

But Doddridge said if there's any criticism to be levied, it should be aimed at the appraisal business.

"I'll stop (using the slogan) the day appraisers stop appraising (our) things for double," he said. The store really does abide by its guarantee, he said. If consumers come in with a low appraisal -- and it happens a couple of times a year -- the store offers a refund or compensation.

He also says Jewelry Exchange pieces are often half the price consumers would pay in a high-end store like Tiffany's, because the company manufactures its own pieces and uses other cost-cutting techniques.

But is the use of the phrase double-value misleading? Elliot Goldman, the Jewelry Exchange's lawyer, says no.

"We stand buy our guarantee. I don't think there's anything misleading about that," he said.

Different kinds of appraisals

Confused yet? The world of appraisals can get even more confusing, warns long-time appraiser Maury Woulf, an accredited member of the International Society of Appraisers and a jewelry store owner. Not only is there a big difference between the appraised value and the market value of an item – there can be big differences among various appraisals conducted for different reasons.

The aforementioned insurance-related appraisal might produce one value. But an "income-value" appraisal, conducted for aging jewelry owner worried about the impact jewels might have on any estate tax an heir would have to pay, would likely produce a different value – probably much lower, for obvious reasons.

Appraisals also are impacted by market conditions, Woulf said. A house in eastern Pennsylvania could be double or triple the price if it was located in Northern New Jersey – and the same ring sold online could be double the price if sold by Tiffany's. Such market considerations are a big factor in appraisals, Woulf said.

"When your wife holds out her hand and tells her friends you bought it at Tiffany's, it is a different product at that point," he said.

And of course, appraisers are human, and will often disagree over the value of an item.

Some mixture of these factors explains how a store could issue a guarantee that items it sells will appraise for twice the value, he said.

Blue Nile, one of the Web's largest retailers, makes no such double value claim, said spokesman John Baird. He did say consumers can often get very good jewelry prices online, but should tread carefully.

"People should comparison shop," he said. Independent grading of diamonds by non-profit laboratories, in particular, make things much easier for consumers. "Diamonds in particular are a very objective product," he said. "... You can compare apples to apples. So do your research."

That research should include understanding promises connected to the value of an appraisal.