Pre-foreclosure is while it is still owned by the current owner. there are investors who specialize in this area and you can read about how to do it in many books as well. I am familiar with doing it, but there are pros and cons.
This involves actually approaching the owner and asking whether they might be interested in selling. Depending on their current financial situation, they may view you as a godsend or as a predator. You can't predict how they might react to your approach. If they're interested it would be the same efforts as done on a short sale procedure. The seller would need to prepare certain documentation about their financial situation and present it to their lender. The lender would determine under what circumstances, if any, that they would accept the sale of the home, where they may be getting less than the full loan amount in the purchase transaction.
This same effort that they would use to create the short sale package is also the package that they would create in order to be considered for a loan modification. They may not even be aware of that fact. If we approached them and they are able to get a loan modification they may prefer to stay in their home.
If they decide to stay in their home, you may be a party to a good deed. You just helped someone keep their home, although you would not have the opportunity to buy it. If they decide to sell it to you then you can get a home for a great price with no competition. When you buy a home as a short sale, you receive the benefits of full disclosure from the seller, more likely that the seller will cooperate with you and not destroy it as they move out, and full clearance of the title of any encumbrances. That would be a good deal for you!
I actually have clients where we've exhausted the market for what they're looking for and we are reviewing the homes in pre-foreclosure status. It's a little more work that way but we were successful on one property already.
If you want more detail, then please contact me. That's pretty much how it's done. It takes sensitivity and finesse. And an understanding that you may just help someone keep their home, rather than take it out from under them. Sounds like a win-win to me! :)