The practice of urban homesteading -- selling rundown or abandoned homes at a token cost to buyers who will fix them up and live in them -- may be expanded in the next year.

Federal officials are proposing "condosteading" as a possible new approach -- converting dilapidated apartment buildings into condonimiums and selling individual units to locally chosen buyers who would promise to put their time and money into rehabilitating the units.

A draft discussion paper circulating within the Department of Housing and Urban Development looks at condosteading as one way to expand the department's urban homesteading program.

Under that program, deserted or deteriorated federally held homes are made availabe to cities, which turn the properties over to prospective owner-occupants for as little as $1 on the condition that the buyers live in the homes and repair them.

President Reagan promised in his campaign to make urban homesteading a more useful tool in redeveloping communities. He has said he also favors increasing home ownership opportunity.

The condosteading proposal, still under debate at HUD, has not yet received Secretary Samuel Pierce's official blessing. It would require funding of $14 million for the first year. That may not leave much room for experimentation, since the current homesteading program already uses $14 million a year.

The District, which operates a HUD-funded homesteading program, would not gain much from the proposed expansion if HUD continued to rely on federally held housing, in the opinion of Salvatore Cicero, assistant chief of the D.C. Neighborhood Preservation Division.

The homesteading program, begun nationwide in 1976, provides funds only for homes acquired by the government through foreclosure on loans that the Federal Housing Administration, Veterans Administration or Farmers Home Administration have guaranteed. The homes also must be in neighborhoods designated as needing revitalization.

HUD officials say the program has generally met its goal of rehabilitating single-family, owner-occupied homes, but they suggest it could have more impact on housing abandonment if the 97 participating cities had more flexibility in their choice and use of properties.

The proposed changes would allow the use of HUD money to pay for the purchase of privately held properties anywhere in a participating city. Eighteen cities already rely exclusively on homes they acquire -- usually through abandonment in tax title or mortgage foreclosure proceedings -- despite the ban on using HUD homesteading money for such properties.

The number of homes the Distict could acquire from owners delinquent in their local real estate taxes is small, Cicero notes. "They're few and far between.

"We have pages of ads for properties for sale" because of tax delinquency, he adds, but most of the nonpayment of taxes in Washington is "because it's cheaper not to pay them the taxes than to borrow the money to pay."

Whereas the city charges interest of, say, 6 to 9 percent on tax arrears, the owner of an apartment building might have to pay 20 percent interest for a private loan. Matters are complicated by the fact that some owners are able to pay off their arrears and legally reclaim their properties a year or two after the city has taken action against the delinquency.

"FHA properties are not that plentiful either," Cicero believes. The District has bought a few from FHA, but at a higher cost than can usuallly be recovered in sales to homesteaders. Sometimes the difference is as much as $15,900 to $25,000. This is because the federal government is obligated to recover as much of its loss as it can on the mortgage foreclosure.

"Admittedly," Cicero says, the properties are "in fairly decent shape," comparatively speaking. But overall, he adds, "I don't have much hope for the District to get much" from the use of FHA or tax-foreclosure properties, "especially with the price of houses locally."

For other cities, permission to buy nonfederal properties with federal homesteading money might mean the cities could offer abandoned apartment buildings to purchasers, in hopes of removing neighborhood eyesores and luring more affluent residents to the area.

This is where condosteading and another option, "investorsteading" come in.

With condosteading, a private developer, condominium association or the city would repair a building's mechanical systems and common areas such as lobby and hallways. The city would pick condosteaders to rehabilitate and live in the apartments.

Several projects would be undertaken at one time, along with improvements to streets and public facilities, to make a greater impact on the neighborhood.

Investorsteading would involve the sale of apartment buildings to profit-motivated buyers, such as partnerships or corporations, to operate as rentals. Prospective buyers would compete for the properties, by offering proposals for rehabilitation.

In a departure from the present program's emphasis on a homesteader's need for housing, the investorsteading proposal includes no requirement that owners rent the renovated apartments to low- and moderate-income tenants. Any form of rent control for these buildings would be discouraged. This means residents needing subsidy to pay the rent would probably have to seek it on their own.

After three years of successful ownership, the investors' conditional title to the property would become a fee-simple title.

The only way investors could afford to rehabilitate rundown buildings, with market-rate financing costs at their present highs, would be to cater to affluent renters, Cicero says: "Middle-income would be out. Unless they had a substantial down payment, the interest would kill them."

Amid all, these proposed changes, the draft HUD paper foresees a continuation of the present concept of transferring properties to low- and moderate-income families, at little cost.

But it's evident that officials believe that people with higher incomes, previously discouraged about homesteading because of program rules, may provide the cure for severely rundown areas