When adding an IP address to DHCP scope options, you get this warning:
The IP address is not a valid DNS address do you still want to add it?
DHCP reports the IP address as not a valid DNS address because it can’t do an NSLookUp using the specified IP address as a DNS server. Try doing an NSLookUp manually using the DNS server’s IP address to confirm.
I suspect that it probably uses the domain name of the machine as the thing to look up, so you may also get the error if the specified DNS server doesn’t have a record for the domain – which is perfectly fine if that’s what you want to do!