Exercising professional judgement in valuation practice

Several sections of RICS Valuation – Global Standards (Red Book Global Standards) require practitioners to apply their professional judgement.

These include:

• PS 2 on ethics, competency, objectivity and disclosures
• VPS 1 on terms of engagement
• VPS 3 on valuation reports
• VPS 4 on bases of value, assumptions and special assumptions.

In addition to the above, all members are bound by RICS Rules of Conduct. These rules govern the behaviour and ethical conduct of members – including those involved in valuation, whose adherence to the rules will ensure integrity and professionalism in their valuation work.

As such, deciding whether to accept a valuation instruction involves the valuer using their professional judgement in carefully assessing various factors.

This judgement includes evaluating their own expertise and competence, remaining objective and independent, assessing the availability of data, and considering legal and ethical standards as well as time and resource constraints.

Professional scepticism in turn involves critical questioning and a willingness to challenge assumptions and information. Doing this effectively means professional judgement is essential, as valuers must make informed decisions about the reliability of evidence, the reasonableness of assumptions, the identification of risks and the communication of findings.

Paragraph 3.7 of PS 2 meanwhile states: 'It is sometimes necessary to disclose some details of the valuer's involvement in the subject of the valuation. If an adequate disclosure cannot be made without breaching the duty of confidentiality, then the instruction should be declined.'

In such cases, a valuer must exercise professional judgement when balancing sometimes conflicting duties. For the sake of transparency, they should record in the file the considerations made in exercising that judgement, and be prepared to justify their decisions if called on to do so.

First, VPS 1 paragraph 3.1(j), implementation paragraph 1, says: 'Where the client will provide information that is to be relied on, the valuer has a responsibility to state that information clearly in the terms of engagement and, where appropriate, its source. In each case the valuer must judge the extent to which the information to be provided is likely to be reliable, being mindful to recognise and not to exceed the limitations of their qualification and expertise in this respect.'

In VPS 1, paragraph 3.1(m), implementation paragraph 4, it adds: 'Some valuations will be for purposes where the exclusion of third-party liability is either forbidden by law or by an external regulator. In other cases, it will be a matter for clarification or agreement with the client, having regard also to the judg[e]ment of the valuer. Particular care should be taken in relation to valuation assignments in connection with secured lending to address third-party liability issues.'

Furthermore, VPS 1, paragraph 3.1(c), implementation paragraph 4, states: 'Valuers should exercise care in considering whether assignment of the valuation engagement contract (as distinct from permitting third parties to rely upon it) is to be permitted, as doing so may expose valuers to additional risks. Valuers should ensure that the terms of their professional indemnity insurance provide the requisite cover where assignment is permitted.'

Each of these paragraphs deals with a different situation that valuers may well recognise from their own work; where they do, they should refer to VPS 1, paragraph 3.1 in full, as Red Book Global Standards can give them a steer on such matters.

This is reiterated in section VPS 3 paragraph 2.1(h), which states that the valuation report must indicate whether 'verification is needed of any information or assumptions on which the valuation is based, or if any information considered material has not been provided'.

Failure to account for information gaps or verify the veracity of information relied on could bring the reliability of the valuation into question.

VPS 3 paragraph 2.1(o) goes on to explain that 'ensuring user understanding and confidence in valuations requires clarity and transparency', but 'how much explanation and detail is necessary concerning the supporting evidence, the valuation approach and the particular market context is a matter of the valuer's judg[e]ment in individual cases'.

The extent of explanation and detail needed can vary depending on the specific circumstances of a valuation, so the valuer must use their professional judgement to decide how much information to provide in each case.

Factors such as the complexity of the property, market conditions and the needs of the client all play a role in this decision.

Valuers should provide enough information to ensure the valuation is fit for purpose and the client can understand it. They also have the flexibility to tailor the level of detail to the specific needs of the situation.

The terms of engagement, also known as the scope of work, comprise a living document and can be amended through agreement with the client at any time before the report is issued.

VPS 4, paragraph 8.4 states that 'if, after inspection or investigation, the valuer considers that an assumption agreed in advance with the client is likely to be inappropriate, or should become a special assumption, the revised assumptions and approach must be discussed with the client prior to the conclusion of the valuation assignment and delivery of the report'.

VPS 4, paragraph 9.3 goes on to state that 'if a client requests a valuation on the basis of a special assumption that the valuer considers to be unrealistic, the instruction should be declined'.

These paragraphs clarify that the onus is on the valuer to decide what assumptions and special assumptions are reasonable in the circumstances to ensure that their report will be as accurate, reliable and defensible as possible.

Although the client may request certain valuation assumptions are made, the impact of those requests on the accuracy of the valuation and whether it is reasonable in the circumstances are for the valuer to decide.

The final article in the series will examine how RICS assesses whether the judgement used by the valuer was sound and reasonable in the circumstances.