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This algorithm can find a buyer for your house

REX is the latest startup hoping to upend the real estate transaction

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America’s housing shortage has made it harder for real estate brokerages to find inventory for sale, but one FinTech startup thinks it knows how to find houses before they even hit the market.

REX, a three-year-old startup co-founded by former Goldman Sachs partner Jack Ryan, processes user data (e.g. recent purchasing history) from third parties such as Google or Facebook with a proprietary algorithm to determine whether that person might be looking to buy or sell a house, and if so, serves users ads on different platforms in hopes of getting them to buy or sell through REX.

The company’s pitch has caught on enough that it’s expanding rapidly, as it hopes to join 10 new markets over the next year. It believes that by charging a 2 percent fee as opposed to a traditional brokerage’s 6 to 8 percent fee, it allows a buyer to buy at a lower price and a seller to sell at a higher price, even on the same house.

“That sounds like it makes no sense, that a seller can sell for more and the buyer can buy for less on the exact same house, but it’s because that huge fee of 6 percent is dramatically reduced,” Ryan said. “So of course that becomes true. That’s what we’re doing.”

REX’s algorithm is also powered with artificial intelligence so it can refine itself in real time. If the algorithm serves someone an ad on Google or Facebook on the basis of a set of online behaviors and that person clicks on the ad, the algorithm would note this as a success. If the person doesn’t click on the ad, the algorithm might make an adjustment so it’s not consistently serving ads to people who are not in need of REX’s services.

This real-time refinement is key to identifying potential customers, but it’s also key to REX’s business model because unlike traditional brokerages, REX has to spend serious money to buy ads to acquire customers, just like any digital marketing shop. The more targeted they can be with their marketing budget the better. Traditional brokerages pay just a small flat fee to a listing service and maybe $50 for a for sale sign before lining up a customer. They also get more than double the transaction fee.

“We pay for clicks, so we actually do have to make sure we’re predicting well because we’ll end up spending money to no benefit,” Ryan said. “And we can, but we do pay money upfront as opposed to an agent who doesn’t.”

In April, REX expanded to San Francisco, Austin, and Denver. It also serves southern California, San Antonio, Houston, Long Island, Brooklyn, Westchester County, and it’s “creeping into Manhattan.”

REX is just one of a wave of FinTech startups hoping to upend the status quo in real estate transactions. Pete Flint, the founder of Trulia, has invested in real estate startups with his venture capital firm NFX. He told CNBC that he believes over the next 10 years, real estate startups will focus on transforming the transaction.

According to Ryan, real estate transaction fees are higher than anywhere else in the developed world, and it’s one of the few industries that relies on service fees that haven’t seen their fees drop as a result of advances in technology.

The result has been a bevy of new startups hoping to take advantage of inefficiencies in real estate transactions. Opendoor and Offerpad, dubbed “iBuyers,” buy houses from motivated sellers at a “fair market price,” and then flip it. Another startup, Knock, has a similar model, except that it buys a motivated seller’s next house for them so they can move right away, and then sells the old house on the open market.

Ribbon, which launched in Charlotte earlier this year, helps prospective homeowners turn their offer into an all-cash offer so they don’t lose the house to an investor or deep-pocketed person who can pay upfront.

While many of these companies have gained traction, venture capital is still flowing into the space, suggesting REX will continue to face competition from new and existing players.