I often people watch when I'm out, I find it interesting.

You get stereotypically good looking people having boring interactions, next to no chemistry, and they still hook up. Good for them. Personally I have to have 3 things before I go with a girl, looks, personality and chemistry. The last two are not the same.

I personally know of a few examples of guys who are not good looking (I genuinely mean near-ugly) who are with pretty stunning girls. Did those girls fancy them when they first met?

No, they didn't. Are these exceptions to the rule? Well, that depends on what rules you play by...