however if he were to try to send btc from an unconfirmed transaction to a third wallet it would fail
This is not correct.
While it is generally a bad idea to do so, there are wallets which will allow users to spend BTC from unconfirmed transactions. As long as the original transaction eventually confirms, this is not a problem. However, if the original transaction becomes invalid (because some replacement transaction is confirmed), then the transaction spending the unconfirmed bitcoins will also become invalid.
2) I get that maybe a few blocks later, the longest chain would be taken and one of the transactions
would be revoked. But how is this reliable at all? The two cars are probably in possession of Alice and Bob already.
Again this is why people wait for the transaction to have been confirmed by at least 6-10 blocks before actually give Alice or Bob the car, if the seller in this case has already given both of them the cars, there would be little he can do about it except file a complaint for fraud/theft or such and such.
In this way, an
unconfirmed transaction is a lot like a personal check. Imagine that you and your wife share a bank account with a $50,000 balance. You both go to separate car dealers and each purchase a $50,000 vehicle with a personal check drawn against the account. Both dealers call the bank to make sure that the funds are in the account before accepting the check. Then after you've both driven off with the cars, the dealers take the checks to the bank to deposit. One check "confirms" and that dealer gets his money. The other check "bounces". This dealer still has the option to have you prosecuted if he has obtained enough information about you (drivers license, insurace card, home address, vehicle registration, vehicle GPS, etc) to track you down. The same is true of a Bitcoin transaction.