Before you spend a bunch of $$ on this issue, it would be wise to determine whether there is actually a problem with the water heater.
The picture below shows the burner section of our Atwood 6 gallon water heater. Spiders are known to be drawn to the odor of propane and may have built a web inside your burner tube. A few years back I had a spider do that right at the elbow of the tube and when I turned the heater on flames came shooting up out of the air slots. This could be the source of your fire and smoke. If so, cleaning of the burner tube will eliminate the problem.
Another possible source of smoke is that wasps or other insects may have built a nest in the larger tube that carries the flame into the heater.
As far as the source of the water you are seeing, propane is a hydrocarbon fuel that produces water and carbon dioxide when burned. With cold water in the heater, the water from combustion will condense on the walls of the tube inside the heater for a while until the tube warms up. This condensate will run out of the low end of the tube, which looks like a leak, but isn't.
