"Why do we charge a percentage of the sales price?"

Over the long weekend I was traveling. By amazing coincidence, I was seated in the airplane next to one of my executives (we call our real estate agents "executives"). He has been in the business a short period of time, and we had a great dialogue.

He posed the question to me: "Why do we charge a percentage of the sales price as our commission?" I really don't know how this form of compensation began in the real estate industry, but it made me think.

I believe that real estate professionals should get compensated for the skills they bring to their customers and to the marketplace: skills like marketing expertise, negotiation skills, market and product knowledge, transactional expertise, to name a few.

Few people realize that real estate people pay for many items for their customers (advertising, inspections, meals, gasoline, etc) with the real possibility that they may never get paid for their time, effort and expertise. This risk is one reason for getting compensated on a percentage of the sales price.

Another reason is that the risk of litigation, the costs of malpractice insurance (called "errors and omissions" insurance), and the cost of any possible settlements if something goes wrong is in direct proportion to the sales price of the home. Therefore, getting compensated in proportion to the same basis makes sense.

Consider if a real estate professional gave a seller a choice: "You can pay me for results only, in the form of a percentage of the sales price. I take the risk that I may never get paid if I don't perform, but I have an incentive to sell your home for you quicker and more efficiently, OR you can pay me by the hour for my time, reimburse me for all my expenses and you will pay me whether your home sells or not. I have an incentive to work less efficiently because I will be charging you by the hour, not for the ultimate result."

Which do you think the client would prefer?