We have been involved in numerous vacation (Vail, Maui, and DVC) rental transactions, primarily as the owner. What we have found is that trust is the most important factor, and the easiest way to put that at ease is good communiation. We give the people renting from us our home phone, cell phone, e-mail and home address. We respond promptly to their calls and messages. We used to do this pre 'net - with the internet, people can find out quickly if we actually exist.
We do not use a contract, but with e-mail we have a "paper trail" of what has been promised by both sides (dates, dollars, non-refundable...), which I believe is as good as a contract, without the hassle.
We have been burned before (people asking us to extend their stay, and they will mail us a check later), but figure that some day they will have to meet their maker. And we do believe in karma - both good and bad.
The best advice is the same that JimMIA has had - if it doesn't feel right, don't do it!
Most of us here want to share the magic - it is not just a business deal.