How we can use valuation software responsibly

Changes in the way people and businesses use property – accelerated by COVID-19 – along with advances in technology and an increasing requirement for consistent, digitally literate valuations have seen more and more professionals using valuation software. 

RICS' Valuation Review also offered specific and related recommendations to make valuation more transparent, explicit and analytical – something valuation software and applications can support. 

Engagement with the valuation industry to provide insight for this article suggested that although technology can support valuation, an overreliance on it without an underlying understanding of valuation technique and process can lead to potential problems.

RICS Valuation – Global Standards (Red Book Global Standards) is being updated this year, incorporating coverage of valuation modelling and data included in the 2024 International Valuation Standards (IVS) effective from 31 January 2025. 

RICS will also need to think more widely about how to integrate tools such as valuation software into future guidance. 

The use of these types varies globally and by size of valuation firm. The cost of software can mean that smaller firms may prefer to develop their own spreadsheet templates, but this is not always the case. Some large, global software providers have a significant market share in some instances. There are also specialist products for specific sectors and valuation purposes.

While I consulted a number of valuation software providers, RICS does not endorse particular commercial products; rather, it seeks to remain engaged with the software industry to understand the opportunities and challenges in this field.

Valuers may need to bear the following in mind when using valuation software and related applications. Many of these principles also apply to valuation analysis more generally.

• Know your working: increased automation can make it tempting to lose sight of the calculations the software is carrying out and the valuation theory it uses. But valuers are required to provide their rationale for every valuation and, depending on the purpose, this may include discussion and even challenge from a third party such as an auditor or regulator. Those I consulted stressed the need for valuers using software to have at least basic, and in some cases more advanced, mathematical and analytical skills. Although software can overcome the repetition and resource-intensity of long-hand valuation, it cannot replace the knowledge of valuation techniques itself.

• Be able to explain calculations, inputs and assumptions to the client: the make-up of assumptions and inputs used in a valuation can be an important part of the rationale. Some individual inputs and assumptions, for example the exit value in a discounted cashflow valuation or the yield used in an implicit income capitalisation, may have a significant bearing on the overall result and may be particularly important to understand. 

• Gauge whether assumptions are relevant and adjust them if they are not: software usually allows the valuer to control most inputs; but by its nature, automation may make implicit assumptions. One that stakeholders in UK commercial property frequently referenced when I spoke to them, for example, was whether rents were analysed annually in arrears or quarterly in advance. 

• When using multiple valuation methods and models, check consistency and explain divergence or convergence: employing multiple methods and reverse-engineering transaction analysis is quite common to cross-check more complex valuations, giving valuers a better understanding of the evidence and outcome and supporting their commentary and conclusions. If using software to overlay different techniques and analyses, however, valuers must be particularly conscious of any implicit changes made by the software and their impact on analysis. Something as simple as, for example, a rounding rule can make a difference depending on whether it is applied on an annual or monthly basis. Different software packages may also be used for the same valuation when investments and portfolios are varied or there are jurisdictional considerations, each of which is likely to have a different interface and may even make differing assumptions. In other cases, valuers like to model in a more open format such as a spreadsheet as well as a software package. This mixture of applications is not in itself a bad thing, but must be careful and systematic to avoid inconsistencies and even errors. 

• Establish a good relationship with the software provider to report bugs and raise queries: there are times when software can go wrong or processes are unclear. Establishing lines of communication with the provider at the start can help, so that if issues occur later the valuation output is not compromised.

• Understand how sensitive the valuation result is to individual inputs and account for this: valuers who discussed sensitivity had a commendable interest in the impact of individual inputs on other assumptions and valuation outcomes, from a simple sensitivity test of one element to a full simulation. However, there was also discussion of the dangers of overengineering and concern that analysis should be appropriate to the task. So while it may not be necessary for all valuations, by understanding sensitivity the valuer is attuned to the weight of their assumptions and more able to spot inconsistencies intuitively. 

• Use the software reporting functions appropriately: it is not always practical to present the entire valuation as seen on screen on a single, easy-to-read page. But presentation is increasingly important because users want to understand the outcome clearly without necessarily seeing every calculation and assumption, though they may want to be able to refer to this. Valuation users often see reports from a variety of sources as well, which can make comparison challenging where these differ. As such, valuers may want to discuss reporting output with the software provider and valuation user.

• RICS members and regulated firms using valuation software must follow Red Book Global Standards: a valuation is not just the output of software but the entire process set out in Red Book Global Standards, from initial considerations of governance, competence and ethics through the terms of engagement, inspection and investigation to reporting. Reporting itself is a systematic set of terms, rationale, commentary and a conclusion that may be more narrative than numeric. The calculation and the written report need to work in harmony and not contradict each other, from relatively simple matters such as currency to more complex considerations such as the valuation basis. 

• Align your use of the software and outputs to the client's terms of engagement and agreed instructions: fulfilling the requirements of Red Book Global Standards will set you up to achieve this goal. The software used should not limit you as a valuer in providing the service you are instructed to carry out.

However, such software is only a tool in the process, and not a replacement for the knowledge and skill of the valuer. Combining the efficiency of the machine with the skill of the professional and the standard defined process will achieve the best result.

What principles do you think are most important in using valuation software? What is missing from those discussed above? Please contact me if you have any suggestions.