What happened

Shares of Front Yard Residential (NYSE:RESI), a real estate investment trust (REIT) that owns single-family homes, fell 20% this morning. Although the market opened lower, too, broader sentiment had nothing to do with the steep price decline at this REIT.

So what

On Feb. 18, before COVID-19-related social-distancing measures had started to take a material economic toll, Front Yard agreed to be acquired by Amherst Residential for $12.50 per share in cash. Front Yard stock initially rose to around that offer price before dropping amid the broader market declines in March, as fears about the economic impact of the novel coronavirus led investors to dump just about everything. However, shares again rose up toward $12.50 after the market recovered from the COVID-19-fueled sell-off. And then, this morning, Amherst and Front Yard announced that the acquisition had been called off.   

The letters M & A with three pairs of hands working

Image source: Getty Images

Investors, obviously, were displeased with the news, pushing Front Yard shares sharply lower. However, the REIT isn't walking away empty-handed. Amherst Residential is buying $55 million worth of Front Yard shares, providing a $20 million loan, and paying a $25 million breakup fee. This should give Front Yard some extra breathing room during what might turn out to be a difficult time for the housing market.

Indeed, it's fair to assume that at least some of the REIT's out-of-work residents could have trouble paying rent. That said, Front Yard noted that its operating performance in the first quarter was very strong despite the troubling trends in the broader economy. Q1, however, was only partly impacted by social-distancing efforts and nonessential business closures. So there's a clear risk that Front Yard's second quarter turns out to be less impressive than the first.   

Now what

This is one more example of why most investors should avoid buying stocks simply because of a takeover or even a takeover rumor: Things sometimes go wrong. Granted, the COVID-19 outbreak is an unusual situation, but it is still better to err on the side of caution when assessing takeover events. If things do turn sour, the fallout is often swift and dramatic. At this point, investors should completely reevaluate Front Yard's future before jumping on board.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.