Earnings of Real Estate Salespersons with Prior Work Experience

By Anderson, Randy I.; Byrd, Anthony K. et al. | Journal of Housing Research, January 1, 2012 | Go to article overview
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Earnings of Real Estate Salespersons with Prior Work Experience


Anderson, Randy I., Byrd, Anthony K., Hurst, Matthew E., Journal of Housing Research


Abstract

This study examines the relationship between earnings in real estate sales and past employment using a nationwide survey conducted by the National Association of Realtors®. The findings show that persons entering into real estate directly as a first career and those with experience in sales or retail do significantly better than others with different backgrounds, after accounting for variables previously shown to factor into earnings. Time spent in the agent's prior career also appears to have a significant effect on earnings.

This paper examines the performance of persons involved in the sale of residential real estate, as well as the relationship of performance to past employment. The results are very important for academics and practitioners alike. For academics, understanding the factors that drive employee compensation, career choice, and career selection is critical across disciplines. In real estate, while many studies have looked at factors that impact the earnings of salespeople, no one has examined the issue of employment history and background on these critical issues. From an industry prospective, firm owners need to understand all the factors that impact earnings to maximize the value of their entity. In particular, understanding how past employment impacts earnings will directly assist in selecting the optimal agents and/or mix of agents for a given firm. The paper derives it theoretical framework from a standard occupational self-selection model. In particular, a simplified human capital model is used to describe the job search decision of real estate agents.1 For simplicity, risk aversion is ignored in the model and generalizations of the outcomes are based on the observed differences in occupational characteristics.

As with prior real estate earnings studies, this study utilizes a version of the Polachek (1981) occupational self-selection model, as well as the Mincer (1970) human capital model. In this setting, the agent chooses an amount of schooling and investment in human capital. Human capital, other than education, is defined as that which increases one's efficacy as a real estate agent. Unlike the Polachek (1981) model, the model in this paper assumes that human capital does not exhibit a condition of atrophy. Instead, no assumption is made as to the direction human capital that is required to be successful in real estate is related with time spent in prior employment. Due to the nature of real estate sales, successful agents rely heavily on referrals and repeat clients, as well as active selling techniques. Agents canvas areas in order to develop a clientele. However it is also possible that individuals become entrenched, stuck in their ways, and therefore find the transition to a different career challenging. The findings show that both the type of specific human capital and the duration can have an impact on the earnings of Realtors®.

Literature Review

Residential real estate sales can be a challenging career. Rookie failure rates have historically been very high. According to Evans (2000), for the ten-year period from 1988 to 1998, the average first year failure rate was 86%. Only 7% of first-year real estate sales people renewed their licenses. And during that time period, 76% of agents earned less than $30,000 per year.

So, what does it take to be successful in residential real estate? A number of prior studies have examined the factors that affect real estate agents' income. This literature has built upon the model developed by Mincer (1970) in order to explain the factors that influence real estate agents' earnings. The traditional approach taken in the human capital studies is to use variables such as experience, typically measured as the difference in age and (school5). This accounts for the fact that a person typically does not start school until the age of five and earns job-related human capital post education. Mincer (1970) and Rosen (1976) also suggest using quadratic terms in order to capture the non-constant marginal returns of experience.

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