I have seen the "there lived" construnction many times, but I have never used it myself. Is it used correctly in this sentence?
"In the little house at the corner of the crossroads there lived an old man."
Is it OK to drop "there"?
"In the little house at the corner of the crossroads lived an old man."
Yes, you can. The original construction is very typical of a folk tale.
I'm not a teacher, but I write for a living. Please don't ask me about 2nd conditionals, but I'm a safe bet for what reads well in (American) English.