Builders who are most likely to get into trouble are "the smaller ones who are under capitalized," says Stan Ross, chairman of the Board of the University of Southern California Lusk Center for Real Estate in Los Angeles. But that doesn't mean you have to avoid smaller builders. Consumers can hedge their bets by checking a builder's track record, reading news and commentary on that builder and just plain asking around, Mr. Ross says.
Question a builder directly about his financing and find out who his lender is, Mr. Ross suggests. And walk out the door if the builder won't share that information.
Hold your deposit in escrow — don't give it directly to the builder. "The last person you want to give it to is the small builder," Mr. Ross says. Walk the project to see how work is progressing, and ask contractors: "Did you get paid last week?" he adds.