Everyone would say gemologist-appraisers, whether a society member or in a non-affiliated status, must avoid charging percentage-of-value-based fees. But within the appraisal world, the topic isn't without its interesting exceptions.

If one was asked if a landlocked country has battleships, the obvious response would be a resounding "no." However, Bolivia, a landlocked country in South America, has a navy with battleships, such as the American-made PR-51 Santa Cruz de la Sierra and the Venezuelan ship Libertador Simón Bolívar. These aren't just vessels that sail on the highest navigable lake in the world, Lake Titicaca, but on the seven seas. But Bolivia has no ports in which to dock their naval warships. Who would have known this, if asked? Sometimes, what everyone thinks is an obvious and unchallengeable answer has interesting exceptions. In the appraisal arena, everyone will exclaim "not acceptable" to the idea of charging a percentage of the value conclusion as the appraisal fee. But is it?

        Circling the Wagons

Most of the real and personal property appraisal societies have adopted the Uniform Standards of Professional Appraisal Practice (USPAP) as a common standard. To be a member of such societies requires adhering to that compilation of standards, which includes a straightforward rule that it is not acceptable to charge a fee based on the value conclusion. Thus, percentage fees are a no-no.

According to USPAP:

"An appraiser must not agree to perform an assignment, or have a compensation arrangement for an assignment, that is contingent on any of the following: . . . the amount of a value opinion."¹

Society courses also embrace the no-percentage-fee ethical rule. The Advanced Personal Property Appraisal course, required by the American Gem Society to earn its coveted Independent Certified Gemologist Appraiser designation, states in its coursework researched and written by this author:

"Appraisers must never charge a fee that is linked to the outcome of an appraisal report. An obvious connection between fee and outcome that would be considered unethical is setting a fee that is based upon a percentage of the value of the item being appraised. The conflict of interest created by charging a percentage fee overshadows any diligent effort an appraiser makes at rendering valid value conclusions."

        Go West Young Appraiser. Go West

California appears to never walk in the same footsteps of other states. There, the State Controller's Office appoints probate referees, which appraise property, both real and personal, for the California probate courts.

"The controller shall appoint at least one person in each county to act as a probate referee for the county."²

These state-appointed probate referees are appraisers used in probate, the legal procedure handling the distribution of assets of a person who has died. They are considered officers of the court and have the power to subpoena information needed to render valuations. Imagine being subpoenaed by an appraiser!

"For the purpose of appraisal of property in the estate, the probate referee may require, and may issue a subpoena to compel, the appearance before the referee of the personal representative, guardian, conservator, or other fiduciary, an interested person, or any other person the referee has reason to believe has knowledge of the property."³

What if unique property needs to be appraised by a professional appraiser?

"A unique, artistic, unusual, or special item of tangible personal property that would otherwise be appraised by the probate referee may, at the election of the personal representative, be appraised by an independent expert qualified to appraise the item."⁴

How are these probate referees paid? They are paid a percentage of their value conclusion for the estate!

The California Probate Code establishes the following:

"As compensation for services, the probate referee shall receive all of the following: (a) A commission of one-tenth of 1% of the total value of the property for each estate appraised . . . The commission shall be computed excluding property appraised by the personal representative . . . or by an independent expert . . . (b) Actual and necessary expenses for each estate appraised. The referee shall file with, or list on, the inventory and appraisal a verified account of the referee's expenses."⁵

        Making a Federal Case out of It

In a charitable donation appraisal assignment, federal regulations state, " . . . no part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property."⁶

What is interesting is that the same regulation barring a percentage fee for charitable donations is absent in the federal code of regulations detailing estate tax liability. If such a regulation existed, then the federal tax system could not accept appraisals from California's probate referees. Is the absence purposeful to allow California's probate system to participate, or do the regulations purposely want non-inflated value conclusions for donated property and possibly inflated values for estate tax purposes? One can only wonder.

        Price Fixing

An interesting twist to the percentage fee issue is whether it is price fixing if a society mandates that its membership cannot charge a percentage fee of the value conclusion. A precedent-setting court case stated, "Gem appraiser brought suit against association of appraisers, alleging that bylaw prohibiting fixed percentage appraiser fees constituted price fixing agreement among members of association and that his expulsion for violation of such bylaw constituted boycott of him by members."⁷

Fortunately, the federal court concluded that " . . . there is insufficient basis in the present record for characterizing the society's prohibition of fixed percentage appraisal fees as price fixing."⁸

One reason for the precedent-setting court to reject the percentage fee as price fixing was that most of the members of the appraisal society were not gem appraisers, and of the few who were, only four had their places of business in his state.

        To Do or Not to Do

As a gemologist-appraiser, you must avoid percentage-of-value based fees, whether you are a member of a society with such a rule, render reports in compliance with USPAP, or even are in a non-affiliated status. It will be assumed that your value conclusion is inflated to increase your compensation. And without a doubt, it will be a critical question asked by the opposition if the appraisal becomes evidence in any legal proceeding.

Written by Bill Hoefer