A short sale--where the seller is selling pre-foreclosure--often offers an opportunity for a good price, but you will need an experienced real estate agent and a real estate attorney with experience in short sales to help you through the process. Don't attempt it without this team in place or it may be too stressful.
So, don't overlook REOs and short sales. But, no, the best deals aren't necessarily (or even almost always) there.
I would include all the homes in my price range, look and compare each and every one of those, foreclosed or not, then determine the best house to buy.
By limiting the search, you are only limiting the potential...
Otherwise, I have found that the same bargains can be found among regular listings. In fact, in a townhome complex near me, unit # 224 sold for $520,000. It was a 3BR/2BA on the marina with a boat slip behind it. It was remodeled with grantie counters, new appliances, etc. The seller was under pressure to sell and dropped the price by over 5%.
The place next door, #223 has been foreclosed on. The bank bought it back at $490,000. It will need at least $45,000 in repairs + back fees to the townhome assocation.