Following comes to us from Deepak Mittal.
If your TFS is configured in domain environment and you are trying to configure build server with local account then it will not work. Essentially when you have your TFS configured in domain environment, but you would like to have a build server in an environment which is not connected to domain, then you need to need shadow account (mirror account).
Here are the steps you need to follow to configure your build server with local account.
Simply fool the wizard by running it while the build server is disjoined from the test domain.
Disjoin the server and reboot it.
Then run the build configuration wizard with the local build account. Now the wizard works as supposed to.
Join the domain again. The service should now runs with the local build account and the application tier accepts the build server.
Note: This is a workaround, not a supported scenario for TFS2012.