how does rent to own work?

Just because the rent to own concept is not a very common way to do a real estate deal, it does not mean one should avoid it under all circumstances. The prices of homes are spiraling downward because there are fewer qualified buyers in the market. The key word in the previous sentence is "qualified". While there are many people who would like to buy a home and can afford monthly payments, they are not able to do so because they are not able to get a conventional mortgage. They are not qualified according to current bank standards. Many thousands of people who were qualified yesterday are not qualified today. This sudden downward shift in the number of qualified buyers has dramatically changed the supply/demand ratio in today's real estate market, and now it is the buying opportunity of a lifetime - if you are "qualified".

No doubt the current economic crisis will pass, banks will get more realistic with their qualification standards and the supply/demand ratio in the real estate market will normalize. But home prices will also rise. Those who are able to take advantage of today's market will be rewarded handsomely. But, what about those who are not able to take advantage in spite of being capable and responsible?

A rent to own strategy is one way you can take advantage of a buyer's market even if you are unable to get a traditional mortgage. With so many sellers in today's market that are unable to sell their home, there is a great opportunity to negotiate a lease that contains an option to buy the real estate for a fixed price (at today's reduced levels) at some point in the future when you would qualify for a mortgage. While there are some risks with this strategy, a properly constructed contract can, and should, benefit both buyer and seller.

It's a tough road, basically.  It only makes sense for folks with bad credit or no down payment money.  They get locked into a contract, but it may not be at a favorable purchase price.  It can work well in some situations, but is usually not favorable to the buyer.

rent to own: where unqualified buyers meet delusional sellers, a match made in heaven! 

Rent to own also called lease option contract is one way towards homeownership.  The basics are:  You write a contract agreeing to purchase a home for a certain amount of money.  In the terms of the contract you determine how much down you will pay as a security deposit usable towards your downpayment when you finally buy the house and usually this is a non-refundable deposit just in case you decide otherwise. The risk to the buyer is you agreed let's say 3 years ago to buy this home for $600,000 and now values are lower than that well if you did not specify that in your contract you might be out of your security deposit.  On the other hand if you agreed to $600,000 and prices went up 20% well it would have been your gain and the seller's loss.  It goes both ways.  I hope this helps.