LITTLE ROCK — When Joel and Amy Jones noticed work starting on a subdivision on the eastern edge of Cave Springs last year, they knew they could have first choice of the lots if they got in on the development early.
Now just a month into their 404 Cascade Lane home, the family is in the first - and only - completed structure of Otter Creek Estates.
But Amy Jones, 36, isn't worried about living in the only house in the 192-lot subdivision. She is sure that others like her - people who want larger lots for their dream homes - will come.
As Northwest Arkansas experiences a slowdown in the demand for lots as part of a larger housing slump, at least one real estate expert recommends that developers consider lowering lot prices and easing minimum house sizes.
But will changes from what was promised inthe development stage have legal ramifications for the developers? And how will homeowners who bought early react to the changes?
SUBDIVISION LIMBO
About 90 percent of subdivisions in Bentonville are unfinished, city Planning Technician Beau Thompson said.
Some developers may have one or two lots left to sell, or they could be waiting to begin a second phase when demand is higher, he said. All subdivisions must be approved through final plat before construction can start, he said.
The Skyline Report, a study of real estate market conditions in Benton and Washington counties commissioned by Arvest Bank from the Center for Business and Economic Research at the University of Arkansas at Fayetteville, has documented an increased supply over the past year of newly constructed homes without buyers.
The center is part of the Sam M. Walton College of Business.
At the end of May, there were 2,411 complete but unoccupied houses in the two counties, according to the Skyline Report. That was down slightly from the previous year's figure for the same quarter.
The number of completed but unoccupied houses grew 17 percent to 2,431 in the second quarter of 2006 over the first quarter's 2,084. That first-quarter number had increased 37 percent over the 2005 fourth quarter's 1,518 new, unoccupied houses.
The downturn in residential demand over the past year has stalled many projects in Northwest Arkansas. Several of those have homes in a price range that is particularly overbuilt in the area, said Jeff Collins, a partner in the Fayetteville real estate consulting firm Streetwise.
Collins recommends that developers consider altering the protective covenants of these subdivisions - where homes cost more than $300,000 - to reduce the required square footage of the houses, thereby lowering the construction costs to a more attractive price.
Linda Smith's 2,400-square-foot house at 5706 S.
66th St. in Cave Springs' Biltmore subdivision was completed in May.
The minimum square footage for homes in that subdivision was changed from 2,400 square feet to 2,000 square feet, she said.
Subdivision owner Mike Pennington confirmed the minimum square footage was changed at the first of the year and said most of the homeowners in Biltmore were understanding. The lower squarefootage requirement makes lots more attractive to buyers because they would not have to spend as much on construction.
"They understand the limits of the real-estate market right now. I think they understand that we are trying to protect them in a very unpredictablemarket," he said.
MAINTAINING PROPERTY VALUE
The average construction cost for residential real estate in the second quarter of 2007 was $102.13 per square foot in Bentonville, said Kathy Deck, director of the Center for Business and Economic Research.
In the same quarter, the construction cost for Rogers homes was $99.80; Fayetteville, $107.01; and Springdale, $96.36.
Smith's son was her builder, so Smith, 60, is not worried about the value of her home. She said it cost about $300,000 to build.
"I'm not worried about reduced property values and I'm not worried about my home. I think it will come back around if you can hold out," she said.
Bill Burckart, owner and president of Burckart Construction Inc., said that while a resurgence of building activity in any neighborhood is productive, it shouldn't come at the expense of the current homeowners.
"It is important to preserve the integrity of the neighborhood and the values of the property and the people who already live there," he said.
Burckart builds in several subdivisions, including the lower-cost neighborhood Veterans Park in Rogers. The two- and three-bedroom houses are priced, pre-construction, between $109,900 and $122,900.
"I have been asked to build one of those houses in other, more expensive neighborhoods and I have refused to do so," he said. "It is not justified, nor is it fair to the current homeowners in that neighborhood. I know it often comes down to a money issue, but that shouldn't affect the morality of the situation."
Frank Rathbun, vice president of communications for the Community Associations Institute, estimates that there are 295,700 private community and neighborhood associations in the United States. Four of every five housing starts since 2000 havebeen in association-governed communities.
The Alexandria, Va.-based institute supports residential associations. Rathbun said the institute does not track state data.
Houses in subdivisions with covenants and neighborhood associations are worth more in the long haul because the contracts raise property taxes and increase the eventual resale value of individual homes, Don Horton told the Democrat-Gazette in March. Horton is a project manager for Arkansas CAMA Technology, the company that assesses residential property for Washington County.
Ethan Nobles, director of media relations for the Arkansas Realtors Association, said he didn't think any subdivisions in Little Rock faced the same drop-off in sales as those in Northwest Arkansas.
"We haven't had the explosive growth in Little Rock, and we were not as overbuilt," Nobles said.
STRIVING FOR AFFORDABILITY
Mike Henry, executive broker with Coldwell Banker Faucette Real Estate and a board member of the Northwest Arkansas Home Builders Association, said smaller homes don't always mean cheaper homes.
"A well-built home with fewer square feet is not necessarily a lower value than larger homes," he said.
The size difference would have to be greater than just a few hundred feet to reduce surrounding property values, he said. "We're talking about something that would have to be a 5,000-square-foot home surrounded by houses of less than 2,000 square feet," he said.
Henry said many developers in Northwest Arkansas have already reduced the prices of lots to try to make homes more affordable. "I know of some lots in Fayetteville that sold for $40,000 a couple of years ago that are now priced in the low to mid-$30,000," he said when asked for an example. "Regionally, there are in excess of 20,000 lots for sale."
Charles Reaves, owner of Reaves Enterprises in Rogers, said he has tried not to be driven by size in his developments.
"We've always set a minimum and it has never been an issue," he said.
He has even set different size minimums in some of the subdivision phases as they are developed. Shadow Valley in Rogers has seven phases, all with different size requirements, he said. And the seventh phase has three neighborhoods with different size requirements.
"We have always been more concerned with quality of construction and architectural standards," he said.
RESTRICTIVE COVENANTS
Restrictive covenants fall into two categories, said Carl Circo, a University of Arkansas School of Law professor. One is what the city may require with the final plat, and the other is filed as part of private restrictions on the deeds of property owners.
The city's restrictions are more likely to limit the ratio of floor area to lot area, with requirements like setbacks on lots and limits to maximum house size on particular-size lots, he said.
The private restrictions are more like a contract between the buyer and seller, Circo said. Those restrictions can vary from limits on housing design and materials to whether owners can hang laundry out on clotheslines. One restriction that is often included is a minimum square footageof the subdivision's houses.
Changing the private restrictions may have legal repercussions for the developer, depending on the language of the restrictions and how they were filed.
"They are a matter of private contract - a matter of record - between the homeowner and the builder," he said. Cities cannot be held liable for private contracts between buyer and seller. Anydisagreement would have to be settled in court as a contractbased suit, he said.
Homeowners like restrictive covenants - or protectivecovenants, as Coldwell Banker Faucette's commercial executive broker Matt Lawrence likes to call them - because they protect the investments made in the property.
By defining the property's use, the size and design of the structures on it, and the upkeep, the property can be maintained in the style the developer intended.
Amy Jones would be upset if Otter Creek developer Gary Brandon Enterprises Inc.
changed the covenants to allow smaller homes.
The Joneses' house is 4,300 square feet. The covenantsrequire a minimum of 2,500 square feet, and they haven't heard any reports that changes are planned.
Two telephone messages left on the cell phone of Adam Russell, project manager for Gary Brandon Enterprises Inc., were not returned. The receptionist at his office said he was out of state last week.
Jones wants to protect the value of the lot and house that cost the family $649,000 to complete.
"If it takes years for this subdivision to fill up, we don't care. We are here for the long haul," she said. "We know we overbuilt." She is not worried about the lack of other buyers yet because she believes the subdivision is just now ready to take off now that utilities are available.
"We realize there are risks, but this is our long-term dream house. So we are hoping there won't be any changes," she said.
Business Matters, Pages 85, 86, 94 on 10/28/2007