[Actually this bug is on EPEL-5, but we don't have a way to file libguestfs bugs against EPEL at the moment] On some distributions, chroot is located in /usr/sbin. If this is not on the path, then you get the error: exec: chroot not found when building the appliance. The workaround is to add /usr/sbin to PATH.
Moving upstream
All platforms that we care about now have /usr/sbin in the path. This does still affect RHEL 5 but we workaround that in the spec file.