The other model, where investors fund development before the house is sold, aligns both parties. The developer/investor wants to produce a good product so that it will sell at a high price and the buyer has the chance to inspect the property before purchasing.

That should be a solution. But not usually that simple, sadly

The developer/investor wants to produce a product that LOOKS good so that it will sell at a high price. Read the other comments about quality

And, those investors often sell the property before it is finished or before it’s even started. So you have the same problem, with a longer chain of middlemen

Personal anecdote. I had a mortgage for 2 full years before being able to move in to my apartment because I bought it before a single stone was laid. The way this works here is that the money is held into an escrow account for most of time, with the construction company only receiving payments in installments (e.g. 'roof finished'). Lastly, the final 5% of the purchase amount is held back until 3 months after the unit is finished, which can be extended if large defects are found. Bankruptcy risk was covered with an insurance, which was a condition to the mortgage.

I guess the money being in escrow puts the risk on the builder instead of the buyer.

anecdotally, we were looking at houses to buy and many of the nice, well-priced ones, had multiple bids and even price increases (e.g. throw another $10k on it). not quite a full-on bidding war, but it became clear that if you want in you get in early, and pay for the privilege's.

same idea, except the place ain't built yet.