Which step involves selecting the proper capitalization rate?

The correct choice focuses on the steps involved in the income capitalization approach to value property. In this approach, selecting the proper capitalization rate is crucial because it directly affects how potential income is transformed into value. The capitalization rate represents the expected return on investment and is used to convert the income generated by a property into a value estimate.

This selection is typically made after estimating potential gross income and determining operating expenses, as those steps provide the needed financial context that informs the appropriate capitalization rate for the property being assessed. The calculation of this rate considers market conditions, risk factors, and the specific characteristics of the property.

While estimating potential gross income and determining operating expenses are foundational steps in the overall valuation process, they do not encompass the selection of the capitalization rate, which is a specific action within the broader framework of the income capitalization approach. Adjusting sale prices of comparables pertains to comparative market analysis rather than the income capitalization process, highlighting the distinct focus of each step in valuation methodologies.