William, to answer your question, think of an owner-financed deal as you would an institutionally funded deal.
You (the buyer) borrows $200,000 from Bank of America to buy a house. At closing, along with many other documents, you sign a promissory note and mortgage (or security deed/deed of trust if the property is in a non-judicial foreclosure state). Three years later, you (the borrower) dies. What happens next? (Before reading the next paragraph, I want you to take out some paper and write down your answers to this question.)
Depending on how the mortgage/security deed is worded, your heirs can continue making payments on the loan. But what if they don’t? What if no one does? Then the lender, according to the terms of the mortgage/security deed, can foreclose. The property (unless another property was used as loan collateral) will be deeded to the lender (or the highest bidder) at the foreclosure auction.
In our case, if Kim and I die at the same time, Terrah, our office manager, will continue making payments to our lenders. Because all of our properties are in title holding trusts, immediately upon our deaths, our beneficial interest in the trust moves to our successor beneficiary. In other words, the second Kim and I die (if were are to die at the same time) our successor beneficiary becomes the beneficiary of the trust. Our successor beneficiary now controls the trust, and thus the property. It is now the successor beneficiary’s responsibility to pay the secured promissory note. If the successor beneficiary choses not to pay the promissory note, then the lender has the right to foreclose.
Hope this helps.