Lease-to-Own deals are typically used in housing market downturns, but can actually be used in any market.
The simplest way to look at it is this:
A Lease-to-Own is a basic lease agreement used with an Option to Purchase contract. A Tenant/Buyer leases the property from the Seller/Landlord for a certain amount of time at a certain price with monthly lease payments. On or before the end of the lease, the Tenant/Buyer has the option to buy the property at that certain price (usually agreed upon prior to the start of the lease). The Tenant/Buyer typically gives the Seller/Landlord money upfront which is usually non-refundable (called option consideration) for the right (but not the obligation) to purchase the property and to take it off the market. Many times, the Tenant/Buyers will receive "Rent Credits" each month which they can apply to the purchase of the house.
It's almost the same as when you lease a car from a car dealer instead of buying it. The car dealer will say that it's $xxxx money upfront and you can drive away with lease payments of $xxx per month. At the end of the lease (however long you agreed to), you have the option of purchasing the car or giving it back to the dealer. It's very similar.
There are a lot of little subtle things that go into the paperwork when you Lease-to-Own or offer your house as a Lease-to-Own, which is why we suggest using a Lease-to-Own Professional or knowledgable Real Estate Attorney/Title Company who has successfully completed one.
Because the Tenant/Buyer is not able to purchase the house using traditional methods (ie...go to a bank and get a mortgage which will CASH out the Seller so he/she can move one) because they either have no or poor credit which is needed to get financing or because they need more time to save up for the rest of the downpayment, the Seller/Landlord will offer them TERMS at a slightly higher total price.
If you would like to see the Pro's and Con's, here is my post on Trulia:
I've also put the benefits for Tenant/Buyers and Sellers on my website too in case you want to check it out.
Hope this helps you out.