How does it work in practice? I tried it about a year ago and it still stomped on /usr/local for some packages. If I remember correctly, that was due in part to the package not making it easy to install elsewhere, but Homebrew didn't handle it well.

It definitely shouldn't do that. Most likely that's a fault with the way the formula or Makefile is written, like hardcoding `/usr/local` instead of using $PREFIX.

It always worked fine for me. /usr/local is not even writable by the user I normally use, so it would have caused an error if Homebrew tried writing there - which it didn't. If you're seeing issues when installing to alternate locations, file a bug report.