In order to protect the public, most states require salespeople and brokers to meet specific licensing requirements, typically in the form of classroom instruction and/or successful completion of an examination. Frequently, however, many real estate brokers require their sales staff to undertake education that exceeds these minimum requirements. In this study, we derive a theoretical model that shows how optimally-timed, firm provided education that exceeds legal minimums can increase staff productivity, reduce litigation risks and perhaps raise and/or maximize the expected value of the firm.

James R. Webb

Randy I. Anderson

English

Research Papers in Economics

JRER  Vol. 20  No. 1/2 – 2000
The Education of Real Estate
Salespeople and the Value of
the Firm
Authors Randy I. Anderson and James R. Webb
Abstract In order to protect the public, most states require salespeople and
brokers to meet speciﬁc licensing requirements, typically in the
form of classroom instruction and/or successful completion of
an examination. Frequently, however, many real estate brokers
require their sales staff to undertake education that exceeds these
minimum requirements. In this study, we provide a theoretical
framework that shows how optimally-timed, ﬁrm provided
education that exceeds legal minimums can increase staff
productivity, reduce litigation risks and perhaps raise and/or
maximize the expected value of the ﬁrm.
Introduction
In order to engage in residential or commercial real estate transactions as a broker
or a salesperson, licensing requirements must be met in most states.1 ‘‘These
requirements were put in place in order to protect the publics who are generally
‘‘uniformed’’ in real estate dealings,’’ (Dasso and Ring, 1995). Classroom
instruction and successful completion of an examination are generally the main
requirements for licensing. After obtaining an initial license, continuing education
is also usually required in order to maintain an active license in many states.
‘‘According to human capital theory, a salesperson should be able to realize greater
earnings through occupational licensing and continuing education requirements,’’
(Ehrenburg and Smith, 1982). In real estate, a large literature exists on the
relationship between educational requirements and earnings. Follain, Lutes and
Meier (1987), Glower and Hendershott (1988), Crellin, Frew and Jud (1988) and
Jud and Winkler (1998) examine how licensing, schooling, experience and
professional training impact Realtor earnings. In general, these studies ﬁnd a
positive and statistically signiﬁcant relationship between these educational
variables and earnings.
Other studies (Johnson and Loucks, 1986; Gunterman and Smith, 1988; and
Shilling and Sirmans, 1988) examine the impact of education and licensing
requirements on service quality. The number of complaints ﬁled against a144  Anderson and Webb
salesperson measured service quality. In other words, the fewer the complaints,
the higher is the assumed service quality. Shilling and Sirmans ﬁnd that licensing
increases the quality of service, but produces anti-competitive side effects.
Gunterman and Smith ﬁnd that minimal levels of education and training reduce
complaints, but additional education provides decreasing returns. The authors
suggest allocating resources away from education and into compliance and
enforcement. Johnson and Loucks ﬁnd that licensing requirements increase service
and improves the competitiveness of the real estate brokerage industry.
The aforementioned studies focus on the implications of educational requirements
and licensing from either the salesperson’s or the consumer’s point of view. While
informative, little research exists that examines the implications and incentives of
education and training from the brokerage ﬁrm’s perspective.
Many residential real estate ﬁrms require or encourage education that goes well
beyond the minimum legal requirements. For example, Century 21 has their
afﬁliates attend a training seminar called 21Plus before they are allowed to have
ﬂoor time. This additional training is done to increase the value of the ﬁrm, either
by increasing cash ﬂows that accrue to the owner-manager, or by limiting the
broker’s liability to the actions of a poorly trained real estate salesperson.2
Madsen (1992) noted that investing in education and professional development
has the potential to yield great beneﬁts to individuals, ﬁrms and the real estate
sector as a whole. The real estate workplace is also evolving rapidly. Firms are
relying on interactive multimedia programs and the Internet, in addition to the
traditional use of the multiple listing service. Takagowa (1996) suggests that
additional education will be required in this setting. Additionally, Nass (1995)
suggests that successful real estate executives need to be highly educated due to
the advances in technology and the emerging global marketplace.
These studies make certain issues clear. First, educating salespeople does more
than just protect the public. Firms often require their salespeople to take
educational instruction far beyond that required by law. This is done to promote
the maximization of ﬁrm value. Secondly, in the rapidly evolving marketplace,
education is needed for ﬁrms to operate efﬁciently and successfully. While all of
these studies point to the value of education, no study has provided a model that
shows the optimal timing and quantity of education that is needed for ﬁrm value-
maximization. The next sections present such a model and provide the managerial
implications and conclusions.
 The Most Rapid Approach Model (MRAPM)
Overview and Intuition
In determining a solution for the optimal quantity and timing of education that a
salesperson requires, the model assumes that there exists a necessary knowledgeEducation of Real Estate Salespeople  145
JRER  Vol. 20  No. 1/2 – 2000
Exhibit 1  Maximizing Real Estate Brokerage Firm Value
set, or base, that real estate salespeople must possess in order to effectively
generate sales and listings.3 This level of education should maximize ﬁrm value.
Hence, the manager’s problem requires selecting the correct amount and type of
education needed to maximize the present value of the cash ﬂows generated by
the salespeople. The actual solution is mathematically rigorous, but a simple
graphical analysis will explain the intuition of the solution.
In Exhibit 1, KL represents the required knowledge base that the salesperson must
possess in order to produce transactions most efﬁciently (efﬁcient in the sense of
ﬁrm value maximization) and point A represents the minimum value of the ﬁrm
at the licensing level of education. Suppose a salesperson is at K(1), where K(1)
 KL (all points to the left of point B in Exhibit 1). Intuitively, a manager would
want to get the salesperson up to the required level as soon as possible.4 Hence,
the salesperson should receive additional relevant education and training quickly,
bounded by the educational cost restrictions of the ﬁrm.5 If the salesperson did
not receive the education, he/she would probably fall further below the required
level for ﬁrm maximization as new relevant information emerges and a decay of
current knowledge occurs.6 The further away a salesperson falls from the optimal146  Anderson and Webb
level, the further the ﬁrm deviates from value-maximization. Once a salesperson
reaches the necessary level (point B on Exhibit 1), periodic education should occur
in order to compensate for the decay in human capital and the new information
in the marketplace. To keep a salesperson at point B, human capital should be
acquired at the rate of decay. However, this may be difﬁcult as the acquisition of
human capital is lumpy, which may force the salesperson to temporarily deviate
from point B. If a salesperson is above the necessary level for reasons other than
lumpy human capital acquisition (anywhere to the right of point E on Exhibit 1),
his/her knowledge base may be allowed to decay until KL is reached. In essence,
allowing a salesperson to leave his/her selling and listing duties to undertake
further education may decrease ﬁrm value.7 If a salesperson receives no education
beyond licensing, then the value of the ﬁrm will decline from point A (on Exhibit
1) as knowledge decay occurs. However, most states now require some continuing
education in an attempt to prevent this.
Formal Model
As noted, the managerial problem is to maximize the present value of the revenue
that a salesperson produces, net of explicit and implicit educational costs, as
shown below:
rt max e {R(K)  K(t)  DK(t)}dt, (1)
subject to: K(0)  K  0. (2) 0
DK  K  Emax  DK. (3)
Where R(K) is deﬁned as the maximum revenues generated from revenue
transactions that a salesperson can earn with educational level K, D8 is the decay
rate of a salesperson’s knowledge set, and Emaxis the maximum amount of funds
and/or time that a ﬁrm can allocate to education. Notice that the change in K is
bounded on the lower side when no funds or time are allocated to education and
the upper bound occurs when the maximum available dollars and time are
allocated to education. Assume that R  0, R  0, and knowledge level changes
can be expressed as follows:
K(t)  E(t)  DK(t). (4)
Let KL equal the level of knowledge that a salesperson must possess in order toEducation of Real Estate Salespeople  147
JRER  Vol. 20  No. 1/2 – 2000
effectively produce transactions. By Euler theorem (see Kamien and Swartz, 1981)
and noting that the rate of change of E is bounded and the deﬁnition of KL, then:
R(K )  r  D. (5) 1
Since R  0, has only one solution and it satisﬁes the properties of a Most Rapid
Approach Path solution because if K  KL, then the solution to Equation (5) is
greater than zero. In other words, if the salesperson’s knowledge falls below the
required level, the change in the knowledge base is positive, and if K  KL then
the solution to Equation (5) is less than zero and the knowledge base is allowed
to decay. As such, the solutions to Equations (1)–(3) is a MRAP9 to KL.
Speciﬁcally, if:
K  K , then K  DK  Emax, or equivalently, (6) 0 L
rt K(t)  Emax/D  (K  Emax/D)e . (7) 0
These equations simply state that education should occur as fast as possible,
bounded by the implicit and explicit budget restrictions, until the required
knowledge base is met (until K(t)  KL). On the other hand, if:
K  K then K  DK  0. (8) 0 L
This simply suggests that knowledge decay is permitted until K(t)  KL. Once KL
is reached, satisfying the problem requires maintaining the required level by
keeping:10
E(t)  DK . (9) L
 Managerial Implications
The results obtained from the MRAP model have several potentially important
policy implications for managing a real estate brokerage ﬁrm. First, the results
imply that managers may want to hire salespeople who are already at, or perhaps
even above, the desired educational level. These salespeople need little training,148  Anderson and Webb
thus saving the ﬁrm educational and opportunity costs. Many potential salespeople
who are at the desired educational level will already be licensed and working in
an existing ﬁrm. Hence, managers should rationally attempt to hire licensed
salespeople working for a rival ﬁrm. This type of hiring practice would increase
competition for salespeople and may impact the current commission structure or
at least commission split arrangements. Anecdotal evidence suggests that this type
of hiring practice does exist in the real estate industry.
Secondly, the results have implications for educational quality. Every hour of
education costs the brokerage ﬁrm both the opportunity cost of the salesperson
being absent from duty and the direct cost of the instruction if the ﬁrm covers
some or all of these costs. If management is going to allocate time and/or funds
to education, it is necessary for managers to ensure that the quality of education
is as high as possible. High quality education may allow the agents to learn more
in a shorter period of time, which could reduce both the explicit and implicit costs
of education, ceteris paribus.
Additionally, managers may want to better understand D, the decay rate, in order
to ensure that their salespeople have the required knowledge base. Perhaps,
periodic tests designed for assessing retention may aid in identifying the
magnitude of D. Moreover, changing market conditions and changing real estate
law will affect D. Managers need to keep the salespeople informed and up-to-date
on these changes in order for the salespeople to remain at KL.
The real estate brokerage business is relying more heavily on technology than ever
before. Virtually all ﬁrms use personal computers for numerous tasks and many
are starting to do marketing and some sales via the Internet. As the use of
technology grows, many salespeople will fall behind, unless they undertake
additional education to keep their skills current. Firms in other industries have
often incorporated devices, such as employee computer purchase plans, in order
to encourage their employees to work with technology and remain current.
Perhaps, more creative compensation/beneﬁt plans need to be considered in real
estate brokerage ﬁrms.
Finally, future research should empirically investigate the timing and quantity of
education that real estate ﬁrms are requiring (or at least encouraging) their
salespeople to take. The fact that ﬁrms like Century 21 provide their salespeople
quick-start programs provides anecdotal support for the model used in this study.
Quick start programs are designed to get the salesperson up to a certain knowledge
level such that they can perform well. Future research should survey managers
regarding their rationale for providing salespeople with the time and funds to
undertake such programs and to determine what effects these programs have on
ﬁrm proﬁtability and value. Ultimately, future research should empirically
investigate what types of educational arrangements are the most effective at
enhancing ﬁrm value.Education of Real Estate Salespeople  149
JRER  Vol. 20  No. 1/2 – 2000
 Appendix
State Educational Requirements
State Pre-Licensing Hours Continuing Education Hours
Alabama 45 w/in 2 years 12.5
Alaska 20 20.5
Arizona 90 24
Arkansas 60 6
California 45  90 w/in 18 months 45/4 years
Colorado NA 24
Connecticut 30 12
Delaware 99 15
Florida 63 plus 45 prior to ﬁrst renewal 14/2 years
Georgia 75 6
Hawaii 45 w/in past year 10/2 years
Idaho 90 12
Illinois 30 12
Indiana 54 16
Iowa 30 36/3 years
Kansas 30 30 new/12 thereafter
Kentucky 96 6
Louisiana 90 8
Maine 39 w/in 1 year 12
Maryland No input 0
Massachusetts 24 12
Michigan 40 6
Minnesota No input no input
Mississippi 60 realtor or 90 college 8/ 2 years
Missouri 60 12/2 years
Montana 60 12
Nebraska 2, 30 hour courses 12/2 years
Nevada 90 30 1st then 15/2 years
New Hampshire None 3
New Jersey 75 0
New Mexico 60 30
New York 45 22.5/2 years150  Anderson and Webb
State Educational Requirements (continued)
State Pre-Licensing Hours Continuing Education Hours
North Carolina 30 w/in 5 years 8
North Dakota 30 24/3 years
Ohio 120 w/in 10 years 30
Oklahoma 45 pre, 45 post 21
Oregon 90 30/2 years
Pennsylvania 60 14
Rhode Island no input no input
South Carolina 30 pre, 30 post 8/2 years
South Dakota 60 24/ 2 years
Tennessee 60 16
Texas 90  30 for 1st 3 years 15/2 years
Utah 90 12
Vermont 0 0
Virginia 60 8
Washington 60 w/in 5 years 30/2 years
West Virginia 90 7
Wisconsin 72 12
Wyoming 30 45
Source: NARELLO (1993–1997).
 Endnotes
1 See the Appendix for a summary of the state licensing requirements.
2 For example, Coldwell Banker recently had to pay $700,000 to settle a claim for an
alleged violation of RESPA. In particular, the salespersons were engaged in illegal
kickback dealings with local bankers (ABA Bank Compliance, 1993). Education may
help eliminate these costs, which adversely impact ﬁrm performance.
3 This assumption is reasonable given the prior empirical evidence that links output to
education as described earlier.
4 If the salesperson did not receive additional training, he/she would not be able to
produce real estate transactions as efﬁciently as required by ﬁrm value-maximization
principles. Moreover, an inadequately trained salesperson may hinder the ﬁrm in other
ways such as litigation fees.
5 Note that many real estate salespersons pay some or all of their explicit education costs.
However, even when this is true, ﬁrms assume the implicit opportunity costs of the
salesperson’s absence from work.Education of Real Estate Salespeople  151
JRER  Vol. 20  No. 1/2 – 2000
6 Knowledge decay can come in the form of a salesperson simply forgetting information
that he/she does not consistently use. Alternatively, effective knowledge decay occurs
when new information enters the marketplace. While the salesperson has not forgotten
any information, his/her knowledge base has decayed relative to its former state.
7 This does not imply that ‘‘extra’’education has other negative side-effects. In fact, having
a very highly educated workforce may be beneﬁcial to a client and/or the general
population. However, the purpose here is to examine the proﬁtability of the brokerage
ﬁrm.
8 Note that it may be possible for a manager to slow D by periodic salesperson assessment
and/or interval training sessions.
9 The optimality of a MRAP can be shown. For an example, refer to Kamien and Schwartz
(1981).
10 The formal model is an application of and closely follows the MRAP model developed
in Kamien and Schwartz (1981).
 References
Crellin, G., J. Frew and D. Jud, The Earnings of Realtors: Some Evidence, Journal of Real
Estate Research, 1998, 3, 69–78.
Dasso, J. and A. Ring, Real Estate, 12th edition, Englewood Cliffs, NJ: Prentice Hall,
1995.
Ehrenberg, R. and R. S. Smith, Modern Labor Economics, Glenville, IL: Scott, Foresman
and Company, 1982.
Follain, J., T. Lutes and D. Meier, Why Do Some Real Estate Salespersons Earn More
Than Others?, Journal of Real Estate Research, 1987, 3, 73–81.
Glower, M. and P. Hendershott, The Determinants of Realtor Income, Journal of Real
Estate Research, 1988, 3, 53–68.
Gunterman, K. and R. Smith, Licensing Requirements, Enforcement Effort, and Complaints
Against Real Estate Agents, Journal of Real Estate Research, 1988, 3, 12–20.
Johnson, L. and C. Loucks, The Effects of State Licensing Regulations on the Real Estate
Brokerage Industry, Journal of the American Real Estate and Urban Economics
Association, 1986, 4, 567–82.
Jud, D. and D. Winkler, The Earnings of Real Estate Salespersons and Others in the
Financial Services Industry, Journal of Real Estate Finance and Economics, 17:3, 279–91.
Kamien, M. and N. Swartz, Dynamic Optimization and Control: The Calculus of Variations
and Optimal Control in Economics and Management, New York, NY: Elsevier Publishing
Co., 1981.
Madsen, E., Promoting Excellence Beyond State Certiﬁcation, Appraisal Journal, January
1992, 86–90.
National Association of Real Estate License Law Ofﬁcials Interstate Cooperation
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Nass, M., Excelling at the Top—What will it Take in the Twenty-First Century?, Real
Estate Finance Journal, 1995, 11, 40–3.
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Real Estate Journal, 1992, 11, 8–13.152  Anderson and Webb
Shilling, J. and C. F. Sirmans, The Effects of Occupational Licensing on complaints Against
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The Agencies, ABA Bank Compliance Journal, 1993, 4, 7–8.
The authors would like to thank Theron Nelson and two anonymous reviewers for
their helpful comments on earlier versions of the article.
Randy I. Anderson, Seton Hall University, South Orange, NJ 07079 or
andersa@shu.edu.
James R. Webb, Cleveland State University, Cleveland, OH 44115 or
j.webb@csuohio.edu.

4, 7–8. The authors would like to thank Theron Nelson and two anonymous reviewers for their helpful comments on earlier versions of the article. Randy I. Anderson, Seton Hall University, South Orange,

Dynamic Optimization and Control:

Excelling at the Top—What will it Take in the Twenty-First Century?, Real Estate Finance Journal,

Licensing Requirements, Enforcement Effort, and Complaints Against Real Estate Agents,

of Real Estate License Law Ofﬁcials Interstate Cooperation Committee,

Promoting Excellence Beyond State Certiﬁcation, Appraisal Journal,

Real Estate Education in Moscow: CCIMs Lead the Way, Commercial Investment Real Estate Journal,

Real Estate, 12th edition,

The Determinants of Realtor Income,

The Earnings of Realtors: Some Evidence,

The Effects of State Licensing Regulations on the Real Estate Brokerage Industry, Journal of the American Real Estate and Urban Economics Association,

What Price for the Virtual Ofﬁce?, Real Estate Finance Journal,

Why Do Some Real Estate Salespersons Earn More Than Others?,

The Education of Real Estate Salespeople and the Value of the Firm

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