A contract for deed can also be known as a land contract. The best analogy is "rent to own", but there is more to it than that alone.
You are right to be concerned about the potential for disaster, but a contract for deed can also be the best thing that could happen to someone without adequate credit for a conventional bank mortgage. Ultimately, seek the advice of an attorney (you can both split the cost, and it shouldn't be that much).
Just as the name implies, you enter into a contract with the intent that at the conclusion of the term, both parties will have satisfied the requirements, and the property will then be deeded from seller to buyer. The seller is really playing the role of banker during the term of the contract. The buyer usually gets immediate occupancy of the property, and has a protected contractual right to purchase it on agreed upon terms. That protected "right" is also an "obligation", however.
Many contracts for deed will involve a down payment, and the balance of the purchase price is financed by the seller in the same manner a bank would do. Most contracts for deed have the initial payments set up on a 30 year amortization at a set interest rate for a set term (3,5, & 7 year terms are common). At the end of the term, the loan payment balloons, and the entire balance is then due to the seller who will in turn transfer full ownership of the property to the buyer.
The idea is that during the contract term, the buyer's equity and/or credit worthiness will improve so that they can qualify for a conventional mortgage and pay the seller off (market appreciation, improvements to the property, pay increases, and timely payments of bills can all serve to improve the buyer's chances).
Default of the contract typically means that the seller will repossess the property, and all of the buyer's payments will be kept by the seller as liquidated damages.
In today's market, it would make sense that someone who wants to avoid the hassle of selling would opt to do a contract for deed. Your friend must be in a pretty good financial position to be able to offer to do this, as many banks won't allow it on their mortgages. Just be careful when doing business with friends or family...it can suck to have a wedge driven between you over something like this.
I am a licensed real estate sales broker and licensed appraiser in the state of WI...14 years experience.