Yes, you are right. It is not a good deal for the renter/buyer in most cases. My friend did many deals like this, and the stories are just insane.
Potential buyers are so blinded by the possibility to own the house (and try living in it risk-free for a while before the purchase) that they throw all reason overboard. They generally are willing to pay an upfront fee (the option), especially if they won or inherited the money. The other possibility is that they have bad credit. This gives them time to clean up the credit, and at the end they can buy the house at the agreed price. The agreed price is generally higher, i.e. 5-10% as you mention, or linked to the market.
There are stories of people putting down $50,000 in cash just to have the chance to own. After they lose their job or can’t clean up their credit, they miss a payment on the rent, and the $50,000 are gone. This happened sometimes after a few months of renting.
Most people walked away quietly, since they didn’t pay rent for a few months, and see their own shortcomings. At that point they don’t even care about the option payment anymore. Crazy!
This is one of the mistakes buyers and investors make: They think the house or stock is going up, and they stop considering any other outcome, including that they could move, lose their job, need money, or the price stays the same. But one has to consider all the outcomes and multiply them with realistic or even very conservative probabilities.
