A wise man once told me, “Not everything has to make perfect economic sense.”

And even if you work in finance, or run your own business, or are just very good with your own pocket-book, the saying holds true.

The government sends you a tax refund and you keep the cheque in your car for two weeks before depositing the cheque in the bank.  That’s a huge loss, right?  A pension fund manager would tell you that these fourteen calendar days of interest represent money that you can never get back!  Except that in this case, the interest could be pennies.  Literally.  So, not everything has to make perfect economic sense.

In the world of real estate, this is often true where you have a product with no fixed value and that which can be valued differently by different people.

A person might pay more money to live in a certain school district, or on a street near a friend.  Neither of those make “perfect economic sense,” but rather represent a price worth paying for that buyer.

You can’t put a price on things like “peace of mind,” which fly in the face of economic sense.

And when it comes to making lateral moves in the real estate market, most of them don’t seem worthwhile to onlookers, but some, if not many do, to that individual buyer.

What is a lateral move, for those of you who aren’t quite caught up?  As a synonym for the word “lateral” might suggest, it’s essentially a sideways move.  In real estate, it could refer to housing style, ie. selling your detached, 3-bedroom house to move to a different detached, 3-bedroom house.  But as we’ll discuss later on pertaining to this example, there are so many ways in which the one house and/or situation could be different from the second one.   So in the context of real estate, a “lateral move” primarily relates to price.

My sister used to live on Merton Street, not too far from our old office.  She was quite comfortable in the unit, in the area, and with the commute to work and to see friends and family, but then one day she came to me and said, “I want to move.”

It came out of nowhere.  And more to the point, she sent me a couple of listings for where she wanted to move to, and the price was barely more than what her place was worth!

This, in my mind, would be a lateral move.

Her condo was worth about $325,000 at the time, and the condo she was looking at was about $350,000.

While those prices aren’t identical, they’re in the same ballpark.

Perhaps here is where we can try to define “lateral move” from a price perspective?

If selling for $325,000 and buying for $350,000 is making a lateral move, then what isn’t?  What if the purchase was for $375,000?  $390,000?  $400,000?

Maybe part of the issue here is that we don’t see condo prices like this anymore, so talking about $325,000 and $350,000 doesn’t resonate.

So then let’s just double the prices here to get with the times.  Let’s say that you’re selling for $650,000 and buying for $700,000.  Is that a lateral move?

I would say that it is.

So what’s the harm in making a lateral move, you might ask?  Why am I barking up this tree in the first place?

Well for starters, there’s the transaction costs involved.  And while this might turn into a forum for “I hate real estate agents,” let’s point out the costs.

On your purchase, you pay land transfer tax.  There’s a sliding scale, and the City of Toronto has a municipal LTT whereas Mississauga, Markham, et al do not, but when you move, you’re going to pay the government for doing so.

On your sale, you’re going to pay real estate fees.  This can run as much as 6%, as little as 1%, or whatever floats your boat.  But let’s assume you pay 5%.

You have legal fees to close both transactions, you’ll pay a mover, and I’m sure you’ll spend a little money on furniture, maybe renovate a little, etc.

All told, some would argue it only “makes sense” to move if you’re buying up, or buying down.  Why bother moving from a $500,000 property to a different $500,000 property if you’re spending $50,000 to do so?

When I asked my sister, “Why in the world do you want to move out there?” she told me something that I didn’t believe.  She told me – wait for it – that there were plans to build a subway along Eglinton Avenue and that the construction and resulting mayhem could last for years.

“A subway along Eglinton?” I mused.  “That’s never going to happen.”

This was a long time ago, keep in mind.

My sister is a simple person with whom I have at least one thing in common: we both value time.  Her commute from her Merton Street condo to work every morning was quite manageable, and it was something she really, really valued.  Once Eglinton Avenue was torn up and the construction on the LRT would begin, this would triple her commute, and complicate her life in an area where she valued simplicity.  She wasn’t really attached to the Merton Street condo in any way, and figured that now was the time (now being 2009, I believe…) to get out ahead of the disturbance from the LRT.

So she bought a condo for $350,000 and sold hers for $325,000.

“It’s a lateral move,” my Dad told me.  “It makes no sense for her.”

Back in 2009, there was only one land transfer tax, and it had yet to be jacked up over and over and over each and every time the government needed more money, so I think it was only around $3,000.

The cost to sell her condo for $325,000 was about $18K.

So she spent $20,000 to move and the new place was marginally more than the first one.

But it was different.  Very different, in fact.

Her old condo was a 1-bed, 1-bath, measuring about 625 square feet.

Her new condo was a 2-bed, 2-bath, almost 900 square feet.

Not only that, the maintenance fees in her old condo were just about to skyrocket.  The building was well-managed, but it was aging, and there were major repairs on the horizon.  The fees for her old 625 square foot condo were $350 per month when she left in 2009, and are now over $750.

Selling a condo for $325,000 and buying one for $350,000 was a lateral move on price, but in the end, it worked out.  And her commute to work, living in the new condo, was less than five minutes, which was something she loved even more than she thought possible.

Here’s an example on the other side of the spectrum…

About six weeks ago, I was referred to a young couple who owned a waterfront condo and said they wanted to move.

They had paid about $400,000 for the condo years ago and it was now worth somewhere in the $600K range.

They told me that they were tired of the cold winters, the amount of renters and AirBnb’ers in the building, and wanted to be in King West.  Despite the fact that all the restaurants and nightlife was closed up (which is the main reason why people want to be in King West), and that most of the AirBnB’s in their building were now gone, they still wanted to move to King West.

They figured that their 1-bedroom, 1-bathroom condo was worth about $700,000, and I said that it wasn’t, but perhaps we’d come back to that after discussing where they wanted to go.

I was very surprised, however, when they told me what they wanted to spend in King West: $700,000.

I explained, “There are a couple of buildings where you can get really great value at that price.  Take 700 King Street West, for example.  For $700,000 you can get a 2-bed, 2-bath, and that would be huge upgrade from where you are now.”

“We don’t like that building,” they said.  “And we don’t really ‘need’ a second bedroom,” was the second reply.

I wasn’t hurt that they didn’t like my suggestion, but I was, however, confused on why they didn’t see the value in a second bedroom, given they were looking to make a lateral move on price at the $700,000 mark.

“We could make do with a 1-bedroom, 1-bathroom, maybe if there was a den or a separate space,” the young man said.

I had to ask: “Why would you want to sell one $700K condo to buy another $700K condo, and come out with the same space?”

They didn’t respond immediately.  I could feel them looking at one-another on the phone, perhaps wondering why I was asking.

“We just want to live somewhere else,” they said.

I explained that in order to pull this move off, they’d pay land transfer tax on the purchase, real estate fees on the sale, legal fees on both, not to mention moving fees, among others.

Then I got to the value of their condo, which I said was worth about $650,000.

“That’s not what another agent told us,” the young lady said

I replied, “Did that agent tell you just how bad the condo market is out there?” to which she said, he did not.

“There was a sale a few floors up for our model for $690,000 earlier this year,” she told me, referring to a February sale, which represents peak-price.

I explained that there were nine competing listings in their building and that they would have to list for $649,900 if they wanted to sell.  I then recommended that they try selling first, since there are no guarantees in this market, and I think that’s about the part where I lost them.

“We’re looking to buy immediately,” she said.  “We really want to get out there and go.”

This whole situation made zero sense to me, so I passed on the business.

I’m not suggesting that I can only work with people who heed my advice, but I do aim to work with people whom I can help.  There’s no helping these people.  Selling their $650,000 1-bed, 1-bath condo to move to a different $650,000, 1-bed, 1-bath condo makes zero sense, and that’s after they come to the realization that “other agents” selling them fool’s good on price isn’t going to help their end-game.  My job is to educate, advise, guide, and deliver results to people.  I don’t believe they were looking to make a smart move, and I’ll do what I can to help the client see that.  If they don’t agree, then I’m not the right agent for them.

I had a similar experience earlier this year when the pandemic was well underway.

A friend of an existing client called me and said, “I want to sell my condo,” but it was one of those situations where they actually wanted to buy somewhere else first.

They too were looking to sell a 1-bed, 1-bath condo for about $700,000 and buy elsewhere for the same price, but these guys were smart enough to know they needed something more.  They wanted more space.  They wanted a 2-bedroom condo, and thus the “lateral move” from a price perspective made more sense than the above example.

I pitched them location after location where they might actually be able to stretch their dollar to what they wanted in a condo, but it was to no avail.

A 2-bed, 2-bath on the Danforth?  Nope.  They weren’t interested.

A 2-bed, 2-bath in a non-prime area of Roncesvalles?  Nope.  Too far west.

I looked at location after location where they could sell their existing property and buy up, but they didn’t like any of the locations.  In fact, they eventually said, “We really like where we are now.”

This made no sense.

If a 1-bed, 1-bath in their building was worth $700,000, and they wanted to buy for $700,000, then it seemed to reason that they couldn’t expect to find a 2-bed, 2-bath in their building, in their price point, right?

It might sound logical to you or I, but they were pretty set on staying where they were.  They looked at other buildings in the area, but that wasn’t going to bear fruit, since they already lived in a value building.  All the other buildings were newer and more expensive.

They were looking to make a lateral move on price, a non-lateral move on product, but wanted the same location.  That equation just doesn’t work.

The bigger problem for these folks was that they were both self-employed and currently not working due to the pandemic, so there was no way they could qualify for a mortgage.

Suffice it to say, their search was halted not long after it began.

If you’re looking to sell your $1,200,000 loft in Queen West and purchase a 3-bed, 2-bath semi-detached house in Danforth Village for $1,200,000, that is not a lateral move.

If you’re looking to sell your $1,800,000, detached, 4-bed, 4-bath house in the Beaches and move to a $1,800,000, detached, 4-bed, 4-bath in Collingwood, then that is not a lateral move.

But it makes little sense to sell your 1A and purchase a 1B, and that’s exactly what a lot of folks in the city do.  I see it all the time.

Lateral moves solely based on price rarely, if ever, make sense, especially when you consider transaction costs.

And I’m not trying to upsell here.  This works both ways.

If the owner of a $4,000,000 house was looking to downsize and take out some equity, it’s easier said than done if that person isn’t looking to make sacrifices.

I saw a friend’s parents do this a while back and try to stay in the same neighbourhood.  They sold for $2,550,000, bought for $2,100,000, and spent over $200,000 to do it.  They went from a detached, 4-bed, on a 36-foot lot to detached, 4-bed, on a 29-foot lot, and it wasn’t long before they realized that the move made little sense.

I can think of many instances in life where I find the expression, “go big, or go home” to be incredibly annoying.

But with respect to avoiding costly lateral moves on price and product in the real estate market, perhaps it rings true…