Yes, a foreclosure is usually a much better deal.  This may change as I think Lenders and Servicers are getting wise to the fact that a short sale is will be less expensive to them even if they sell it for slightly lesser than what they might have got if it went to foreclosure. But as of NOW Jan/Feb 2009.

Problem is, since most of our mortgages are not portfolio, (meaning the bank that gave you the mortgage doesn't hold on to it, they sell it in what is called the secondary market) so this means that the current servicer who may or may not be your original lender is bound by rules in regards to allowing a certain number of "negotiated" mortgage settlements in their pool.  This number is roughly 3%-5%. Once that number is met, technically they are contractually obligated to let the loan go to foreclosure before removing it from the pool.  (this is currently a source of litigation)

Our company handles both REO's (foreclosures) and Short Sales.  Most of the posts I see here are dead on with regards to which one is usually better for the buyer.... REO's.  

As for buying a REO, most are going to need a little (or a lot) of work.  However the worse the property the better the deal for you.  I encourage all savy buyers to look into distressed properties.  There is a loan program called a 203k.  It is an FHA loan and one of the best lenders who offer this is Wells Fargo.  This is a fantastic loan.  The loan program finances ALL of your rehab costs plus the mortgage while the property is undergoing rehab.  

I suggest finding a property with the basic must-haves for you....  General Size, Location, Proximity to work, Safety, Good Neighbors, etc and then finding the most beat up REO in that neighborhood.  Most of these properties will be priced well below market and because of its condition you will not be competing with 20 other offers.

You stand to get the best bang for your buck with this strategy.

Good Luck,

Your friends at Instaclose