For the caramel sauce: Combine sugar and water in a medium saucepan over medium heat. Stir until the sugar dissolves, then stop stirring and let it cook until golden amber in color. Pour immediately into flan molds and swirl to coat the bottom. Allow the caramel to set as it cools.

1. For the custard: Whisk together sweetened condensed milk, evaporated milk, eggs, sugar, and vanilla extract in a bowl. Strain the mixture through a fine mesh sieve for a smooth texture.
2. Preheat the oven to 350°F (175°C). Prepare a water bath by placing the caramel-coated molds in a large baking dish and adding hot water halfway up the sides of the molds. Pour the custard mixture into the molds and bake for 45-60 minutes until the center is slightly jiggly. Let cool, then refrigerate for at least 4 hours.
3. To serve: Run a knife around the edges of the flan and invert it onto a plate. The caramel will flow over the custard for a beautiful presentation. Serve chilled.