I have enough money in my 401K to pay off the Rental.

However, we backed out of said deal because we found out we would only qualify for a certain amount of money on a second loan that was way too low for the market I live in.

Yes, we flipped it to get a chunk of money to invest in other properties, but the chunk somehow slowly disappeared taking care of 3 kids, eating out, etc.Maybe what I learned is to get your financial house in order first. 

When you learn you take action when you take action you make money...

Not only are they trying to watch out for there safety, but hey they are bringing up a very valid reason of up keep on your property just as if you had an appliance fail, you go fix it, but only this situation is more reason to give you more service/money made/good review if you show that you give somewhat of a care in the world if the people that are paying your bills are in good hands.

But I think that would money down the drain.

Regardless of your FICO, you will need cash money to be able to invest in holdable real estate.  

Since you didn't have anything in your contract beyond the 2 3-month extensions for a point each, i would assume it could be contested legally as far as any additional points that would be paid for the extra time beyond the first 18 months since it's not in writing.

Say your rental is worth 100k, pull out 70k, find a property for 40k, and put 20k into, and 10k into holding costs and extra buffer.Refinance that rental at say 100k,at 70% LTV and get 70k back. 

Or are you looking to raise money for the down payment?