The flight instructor was giving two student pilots their first flight lesson. After 20 minutes of taxi instruction, they departed the airport and flew for 20 minutes. While returning to the airport on final approach, the flight instructor advanced the power because the airplane was low on the approach path and discovered the engine had lost all power. The airplane was beyond gliding distance to the runway so the flight instructor made a 20 degree right turn and landed on a road located a quarter of a mile short of, and just to the right of, the extended runway center line. The flight instructor had to cross a high fence to make the road. The airplane cleared the fence but subsequently stalled about 10 to 15 feet above the road. The pilot made a hard landing on the road but, the road curved to the right and he was unable to keep the airplane on the centerline. The airplane then went off the left side, struck a log, and the left wing tip made contact with a fence post. It then ground looped and came to rest. Examination of the airplane revealed the left wing was substantially damaged, a large quantity of water was present in the right wing tank, and the fuel separator was full of water. Further examination revealed the right wing tank recessed type fuel cap seal had been leaking, and the airplane had been outside for several days in the rain. During preflight, the flight instructor drained all the sumps but did not notice the clear "fluid" that he drained from the right wing tank sump was all water. This was his first flight in the airplane and the preflight was conducted in light drizzle during a rain shower. The flight instructor advised that he did not remove or examine the fuel caps during the preflight as he did not want the water that had pooled in the cap recesses to get into the tanks. He did notice that the "fluid" from the right wing was not the proper color but attributed this to automobile gasoline that had been used in the airplane previously, as it had the odor of automobile gasoline.