Why professional judgement matters in valuations

RICS Regulation has been seeing an increase in the number of cases where members have carried out valuation work with insufficient due diligence.

For example, some valuers have:

• voluntarily dispensed with physical inspection of a property when this should have been carried out, and not adequately recorded their rationale for doing so
• failed to undertake the desktop enquiries reasonably expected of a professional adviser that would have revealed issues material to value
• not taken reasonable action to verify the accuracy and reliability of information on which the valuation relies.

Valuations prepared without sufficient due diligence can be unreliable, and thus undermine public and consumer confidence in the high professional and ethical standards expected of RICS members and regulated firms.

For that reason, it is worth reiterating how and why RICS expects valuers to exercise professional judgement when carrying out instructions.

RICS Valuation – Global Standards (Red Book Global Standards) may set out the rules – but if members are not following these as they should, a timely reminder can help them make proper sense of our standards.

RICS recognises that many valuers work under pressure in terms of time and fees; however, this does not justify curbing professional due diligence in circumstances where it is required.

Professional judgement requires that you make decisions, analyses and evaluations on the basis of your knowledge, skills, training and experience, in accordance with the standards, laws, regulations or principles applicable to your area of work, in the best interests of your client and the wider public.

Consistency, objectivity and transparency are fundamental to building and sustaining public confidence and trust in valuation. This depends on valuers having the appropriate skills, knowledge, experience and ethical behaviour to form sound judgments and to report opinions of value clearly and unambiguously to clients and other valuation users, in accordance with globally recognised norms.

Red Book Global Standards, national supplements and jurisdiction guides contain:

• professional standards centred on ethics and conduct, underpinned by knowledge and competence
• technical standards centred on common definitions and conventions, underpinned by consistent application through recognised approaches
• standards for the quality of work to be performed, which centre on rigour in analysis and objectivity of judgement backed by appropriate documentation and clarity when reporting, as well as standards that correspond with those in the Rules of Conduct.

While much of Red Book Global Standards are mandatory, some aspects do not direct or require any particular course of action. Instead, they set out fundamental principles and concepts that must be considered when undertaking a valuation.

A valuer's ability to apply sound professional judgement is critical, and it is therefore fundamental to the integrity of the valuation process that all RICS members practising in this field have the appropriate experience, skill and judgement for the task in question.

Such professional judgement is a key aspect of valuation and involves applying a combination of expertise, experience and sound reasoning to arrive at a reliable, well-informed estimate of value.

It is vital that RICS member valuers have the confidence and willingness to make decisions based on their own professional judgement and not be influenced by the attitude of the client or others.

• Understanding valuation methods: valuers should have a strong understanding of various methods, such as the market approach, income approach and cost approach. They should also have the knowledge and experience to choose the most appropriate for the asset type and valuation purpose, which itself demands professional judgement. If the valuer does not have the requisite knowledge and experience, the instruction should be declined. Please refer to sections VPS 1 paragraph 3.1(g), implementation paragraph 2, and VPS 5 of Red Book Global Standards.
• Market knowledge: valuers must have a sound understanding of the local market, which includes knowledge of recent sales, market trends and the local factors that influence values of the particular asset or liability type.
• Analysis of comparable sales: when using the market approach, valuers must exercise professional judgement in selecting and analysing comparable sales, or comps. They must use their experience-based judgement to consider the similarities and differences between the subject property and the comps, making adjustments as needed to arrive at a reliable and justifiable valuation figure. The current edition of Comparable evidence in real estate valuation RICS professional standard gives more information on this.
• Economic and environmental, social and governance (ESG) factors: valuers should consider broader economic and ESG factors that may affect property values, such as interest rates, economic indicators and any ESG matters that could affect the property. Please see section VPGA 8 of Red Book Global Standards.
• Assessment of unique property features: unique property features may not fit neatly into standard valuation models. Professional judgement is necessary to assess how such features contribute to or detract from the property's overall value. Valuers must be prepared to explain and justify their reasoning.
• Data verification: valuers must verify the accuracy and reliability of the data used in the valuation process, such as information provided by clients and property owners and data from public records or other relevant sources. Professional judgement must be applied to assess the credibility of the information. This is covered in section VPS 2 of Red Book Global Standards.
• Consideration of market conditions: markets are dynamic and can change. Professional judgement involves considering the current state of the market and making adjustments to reflect any changes that may have an impact on values.
• Legal and regulatory compliance: valuers should ensure that their assessments comply with the law and applicable regulation. Professional judgement is used to interpret and apply relevant laws, standards and regulations in the valuation process.
• Communication with stakeholders: effectively communicating the rationale behind valuation decisions to clients and stakeholders also requires professional judgement. Valuers should be able to explain their methods, assumptions and any limitations in a clear and understandable manner, tailoring their communication to the maturity and sophistication of the client. Please see section VPS 3 of Red Book Global Standards.
• Continuing professional development (CPD): staying informed about trends in the sector, changes in regulations and advancements in valuation methodologies is crucial. Professional judgement evolves with ongoing education and staying abreast of developments. The RICS CPD compliance guide gives information on how members must comply with CPD requirements.

It is clear, then, that professional judgement in valuation involves a holistic approach, combining technical knowledge, market expertise and critical thinking to produce accurate and reliable valuation results.

 It requires a balance between applying established methods and adapting to the unique characteristics of each asset or liability and its market.

The second article in this series will explain how RICS expects members and regulated firms who undertake valuations to exercise and demonstrate professional judgement, particularly when carrying out physical inspections and desktop investigations.