Due diligence urged to underpin reliable valuation

As RICS Valuation – Global Standards (Red Book Global Standards) details, in section PS 2 Ethics, competency, objectivity and disclosures, a valuer should not contemplate carrying out a valuation without detailed knowledge and understanding of the matters that are relevant to the asset type, location and valuation purpose.

Much of this knowledge will be gained through undertaking reasonable due diligence on all relevant matters, right from the initial decision to accept the instruction all the way to the reporting stage; the importance of such due diligence having been outlined in the previous article in this series.

Due diligence for valuation work can take many forms, including:

• property inspection
• desktop investigations into matters such as title, planning permission, zoning, sustainability and environmental, social and governance (ESG) matters
• gathering comparable information and market data
• verifying information received from the client and their professional advisers
• searching for information online.

To maintain and strengthen public confidence in the surveying profession, it is important that RICS members undertaking valuations can demonstrate, if asked, that they have undertaken appropriate due diligence for the particular valuation purpose.

They also need to show that dispensing with certain investigations has not unduly affected the reliability of the valuation figure they report to the client.

A decision to skip this process must be documented and justified clearly in the valuation file because – although this is not prohibited by Red Book Global Standards section VPS 2 Inspections, investigations and records – dispensing with a physical inspection is generally considered poor practice for several reasons.

• Condition assessment: a physical inspection allows the valuer to assess the current condition of the property. This includes checking for any structural issues, damage or other factors that may affect value. Without a physical inspection, important details about the property's condition may be overlooked, leading to an inaccurate valuation.
• Local factors: such inspection enables a practitioner to evaluate local factors that can influence a property's value. These include the neighbourhood, proximity to amenities, public services and the overall appeal of the area. Factors such as these can significantly affect the property's value and cannot always be accurately assessed without the valuer being physically present.
• Comparable sales analysis: during an inspection, a valuer can identify and compare the property to others recently sold in the vicinity. This helps to determine a more accurate value based on actual comparisons.
• Legal and planning compliance: a physical inspection allows for a review of the property's compliance with, among other things, applicable legislation and regulation, as well as planning permissions or conditions. This is crucial for understanding any restrictions or limitations that may affect the property's use and, consequently, its value.
• Unique features: some properties may have unique features that contribute to their value, which may not be evident from photographs or documents alone. Only a physical inspection allows the valuer to identify and account for these unique characteristics.
• Verification of information: a physical inspection enables a valuer to verify the accuracy of information provided by the client or gathered from documents. This helps prevent reliance on potentially incomplete or inaccurate data.

The first-hand understanding of the property's condition, surroundings and other relevant factors that a physical inspection provides is therefore of great importance.

Section VPS 2 of Red Book Global Standards covers inspections, investigations and records. Paragraph 1 states that 'inspections and investigations must always be carried out to the extent necessary to produce a valuation that is professionally adequate for its purpose. The valuer must take reasonable steps to verify the information relied on in the preparation of the valuation and, if not already agreed, clarify with the client any necessary assumptions that will be relied on.'

It goes on to state: 'when determining the extent of evidence necessary, professional judgement is required to ensure the information to be obtained is adequate for the purpose of the valuation and consistent with the basis of value adopted.

'In each case the valuer must judge the extent to which the information to be provided is likely to be reliable[,] and be mindful to recognise and not to exceed the limitations of their qualification and expertise when making this judgement.' 

The degree of inspection or investigation that is appropriate will vary depending on the nature of the asset and the purpose of the valuation.

 Except in the circumstances described in Red Book Global Standards section VPS 2, paragraph 2, on revaluation without reinspection of real property previously valued, valuers are reminded that to dispense voluntarily with an inspection or examination of physical assets may introduce an unacceptable degree of risk in the valuation advice to be provided. The rationale for dispensing with such an inspection must be noted in the file.

Valuers voluntarily dispensing with a physical inspection of the asset to be valued may be called on by RICS to justify themselves. This may happen at the regulatory review to which RICS-registered valuers are subject at least once in their career, and in circumstances such as their annual return being flagged for risk, or RICS receiving a complaint or other information that prompts concern.

RICS accepts that a client may sometimes require restricted services; for example, a short timescale or limited investigations. However, according to VPS 2, paragraph 1, 'it is the duty of the valuer to discuss the requirements and needs of the client prior to reporting and use professional judgement to decide whether the restriction is reasonable, with regard to the purpose for which the valuation is required.

'The valuer may consider accepting the instruction subject to certain conditions, for example that the valuation is not to be published or disclosed to third parties. If the valuer considers that it is not possible to provide a valuation, even on a restricted basis, the instruction should be declined.'

Section VPGA 8 of Red Book Global Standards provides additional commentary on section VPS 2, and is best practice guidance on the valuation of real property interests.

Valuers, clients and other valuation users often ask RICS about the extent of investigation that is appropriate, or about the nature of valid assumptions they might make.

The guidance in VPGA 8 cannot cover all circumstances, and the valuer's knowledge, experience and judgement will always need to be brought to bear on individual assignments.

How appropriate limitations and restrictions are to the valuer's due diligence, and the consequent assumptions to be made, must be assessed by the valuer on a case-by-case basis.

Inspection of the property is recommended in Red Book Global Standards, and any departure from this should be discussed and agreed with the client in the terms of engagement and noted in the body of the report. The rationale for so doing should also be noted in the file.

Any failure to follow this process undermines the credibility and reliability of the valuation, and can render the resulting report unfit for purpose. This poses a risk to the client, the valuer, the firm and the reputation of the wider profession.

In the third article in this series, we will highlight other situations where Red Book Global Standards call on valuers to exercise professional judgement.