I ride a 48cm cervelo RS w 650c wheels. Its the best handling bike I ever had, and there is no toe clip overlap. I have no problem getting tires (love the schwalbe stelvio 23c), and in a pinch you can use a folded over 700c tube. The aesthetics are great too (see pic attached). I posted the pic to make the point that everything on a bike needs to be proportional, so it makes sense that a small frame will have small wheels, shorter reach bars, etc.
If you want wider tires (terry makes a 28c) or do like Deb, and ask your builder to make it so you can swap out 650c and 26" wheelsets.
I think its crazy to build a small frame around 700c wheels unless you require neutral race support that only carries 700c.
Regarding the gearing, its true that the gearing will be lower for the same chain rings, but I found for me it made it easier to gear the bike a tad lower which is great for climbing. Mimi, there is no reason to believe you would work harder with smaller wheels as long as you choose an appropriately sized chain rings and casette.
So, while there are more choices in wheel and tire for 700c, there is no shortage of excellent wheels and tires in 650c, although you may have to mail order.



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