Short and sweet, I would not touch this with a 10 foot pole. Any scheme that involves gives you a $5000 payment up front is just too good to be true. Though this may be legal there is just too much that skirts crossing the line into mortgage fraud as Fredr123 has pointed out.
If being approved by a bank as rental, this 'arrangement' may be possible but I don't know any major lender that would approve a loan knowing this was the actual situation. Right there this is fraud by non-disclosure or misrepresentation.
I would really love to see copies of the actual agreements rent2own uses and see just how they make their $$$ especially in a declining market where job losses are imminent. The risks to your friend could be huge. Obviously they would make it so the risk to themselves is minimal compared to the mortgagor and renter. It take a desperate renter and an overzealous investor to make this work.
Let us not forget it is putting people in homes en masse they could not afford that caused the whole subprime meltdown in the first place.
Here's a link to RECA's tip sheet on mortgage fraud:
http://www.reca.ca/Consumers/consume..._Tip_Sheet.pdf
Good luck!