Understanding Trust Deeds and Calculating Payoffs in Real Estate Transactions

A real estate broker lends his own money to Buyer to aid in purchasing a home. The note is for $4,000, and will be secured by a trust deed on the purchased property. The note interest rate is 12% per year, with monthly payments of $40. Final payoff will be on the 48th monthly payment. Which of the following is true?

• A. Broker holds legal title to property
• B. Broker is in violation of usury
• C. Final amount of payoff on the 48th month will be $4,040
• D. None of the above

Answer: (C)

The correct answer is C. The final amount of payoff on the 48th month will be $4,040. This is because the monthly payment is $40, which includes both principal repayment and interest. With a 12% annual interest rate on a $4,000 note, the monthly interest would be $40 ($4,000 x 0.12 / 12 months = $40). Therefore, each monthly payment of $40 includes interest, and by the 48th month, the accumulated interest would total $40 x 47 = $1,880. Adding the original principal amount of $4,000 to the interest brings the total payoff amount to $4,000 + $1,880 = $4,880. The other options are incorrect: Option A is incorrect because when a trust deed is used as security, the legal title to the property is held by a trustee, not by the broker. Option B is incorrect because usury laws prohibit charging excessively high-interest rates. In this scenario, with a 12% annual interest rate, the broker is not in violation of usury laws. Option D is incorrect because as explained above, option C is true.

When studying for the California Real Estate Exam, there are a lot of concepts you'll run into that might sound a bit daunting at first. But don't worry—I’m here to break them down for you in a way that’s easy to digest. One essential area of real estate knowledge includes understanding trust deeds, particularly when it comes to handling loans between brokers and buyers. Let's take a closer look at a scenario that encapsulates this perfectly.

Imagine a broker lends $4,000 to a buyer for purchasing a home. The excitement of home ownership is palpable, isn’t it? But this isn’t just a simple handoff of cash. The broker secures this loan with a trust deed on the property. So what does that really mean for both the broker and the buyer? Well, if you’re scratching your head over the specifics, you’re not alone.

Firstly, the loan has a 12% interest rate, which sounds pretty typical. But what might catch you off guard is the monthly payment only being $40. You might think, “Wait—$40 for a $4,000 loan at 12% interest? That seems low!” And well, you’d be largely right. But here's where it gets interesting. The final payoff will happen on the 48th month, which includes both principal and interest, culminating in a total payment of $4,040.

Now, why $4,040? Think about it like this: each month, the borrower pays interest and chip away a bit of the principal. The interest for a $4,000 loan at 12% annually works out to—hold onto your calculators—$40 per month. So after 47 months of payments, the total interest accumulated would equal $1,880. Adding this to the original loan amount gives you the final payoff of $4,880. But, if we think about it more carefully, no, that’s not quite right because we haven't counted all the payments. That's where the joy of numbers gets fun...or confusing.

So what can we learn from this scenario? Well, let's be quick to establish that option A—from our question—says that the broker holds legal title to the property. That one’s a no-go. If you’re securing a loan with a trust deed, the actual legal title goes to a trustee, keeping everything aligned, or should I say “in trust?”

Then there's option B, which mentions usury laws. Would the broker be stepping over the line? Not here. Charging 12% interest isn’t against any laws in California. So, cross that one off the list too.

And you guessed it: option D suggests that none of the statements above are true, but we already know that's incorrect because option C is undeniably the standout star of this story—the final amount is indeed $4,040.

Isn't it funny how much we can learn from these scenarios? Each facet of real estate, from trust deeds to interest calculations, can feel like deciphering a code. But understanding these concepts is absolutely critical for your success as a real estate professional. So the next time you're checking your calculations—or maybe it's crunch time before your exam—remember this little exercise with loans, trust deeds, and total payoffs. You’ll be much more ready to handle real-world transactions when you grasp their underlying principles.

Wrap your head around this, and you'll not just ace your exam—you'll also walk into your real estate career with confidence. You know what? These little details can make all the difference, so keep your chin up and keep studying!