Vilfredo Pareto was an Italian economist who lived from 1848 to 1923. Pareto observed that 20 percent of the Italian people owned 80 percent of the nation's accumulated wealth. Pareto's observation became known as the Pareto Principle. Today, the Pareto Principle is commonly referred to as the 80/20 rule. This 80/20 rule is based on the principle that 80 percent of all results are derived from 20 percent of all effort. This means that 80 percent of all activity is a lesson in futility and wasted effort. The 80/20 rule, as it applies to buying real estate options, can be best summed up in this corollary: Eighty percent of all real estate option profits come from just 20 percent of all properties. In other words, 8 out of every 10 properties are not potential option properties. But there is no such thing as a perfect option property. As you will learn in this chapter, the most profitable types of properties to put under option are usually castoffs and dysfunctional properties—what I commonly refer to as bad buildings—with hidden profit potential, which is not visible to most real estate investors.
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