I agree with most of what Dana wrote, but I'd like to clarify a few points.
First, a lease-option (aka lease-purchase or "rent-to-own") transaction IS a form of seller financing, and it's NOT the same thing as a land contract (aka "contract for deed"--which is another form of seller financing).
Second, a lease-option is a compound transaction which consists of 3 parts: 1) an option to purchase a property by a future date at a specific price, 2) a lease, and 3) the purchase and sale agreement. The seller will collect an option fee that could be any agreed upon amount (and I'd probably not offer any more than 1% of the purchase price). One may negotiate whether the option fee is negotiable, and whether one may apply it to the purchase (as part of the down-payment). The buyer and seller will negotiate the amount of the down-payment (typically 10%). If a buyer can put 10% down already, then it would make more sense for the buyer to purchase the property using a wrap (aka "subject-to mortgage" or "all-inclusive trust deed"--which is yet another form of seller financing) instead of a lease-option. The seller handles the lease as a standard lease, and should make sure to include a provision in the agreement that the tenant/buyer has to be current on the rent in order to exercise the option. In addition to collecting market rent, the seller will collect an additional monthly fee (that's typically refundable--but can be negotiated to be otherwise) that will be escrowed for the down-payment. Upon the completion of the lease, the tenant/buyer may opt to exercise the option, renew the lease, or move out. If the tenant/buyer opts to exercise that option, then s/he usually will purchase the property using a wrap--unless s/he opts to obtain new, conventional financing instead.