They are an alternative method of financing the purchase and sale of property. Instead of the buyer getting a bank loan, payments are made to the seller. The arrangement has its advantages, by taking payments over time a seller can in some cases save on taxes. Buyers who are not able to get bank loans have an opportunity to purchase properties they could not otherwise afford.
Contracts for deeds are not all good, there are serious negatives. When bank financing is involved, lenders will require appraisals and inspections in order to be sure that there is enough value in the property to cover their loan. In a contract for deed none of that is required, properties can be sold for well over market value, and major defects can go unnoticed when buyers do not do the inspections and appraisals themselves. The process of cancelling a contract is much faster than foreclosing a bank loan, meaning buyers get minimal notice before losing their property. Sellers can also be taken advantage of; buyers can stop making payments and leave the property in terrible condition. For all of these reasons, contracts for deed transactions are much more likely to end up in legal disputes than bank financed properties or cash sales.
Contracts for deeds can work as they are appropriate in some situations. If you are thinking of buying or selling with a contract for deed, be careful. If you are a buyer, make sure the seller has a clean title to the property, and that it is worth the price you will pay. If you are selling, be careful who you sell to, make sure they are not likely to cause major damage to the property, leaving you with a large repair bill if they stop paying and leave.
Ed