The creatures that live in the house turn out to be Fairies that have made a pact with Man to keep at bay and only take one child for sustenance.
Kim (Katie Holmes) finds out that Blackwood, the artist who lived in the house years ago, had a 10 year old son that was taken by the fairies and years later Blackwood himself disappeared. Before he disappeared, he left behind many paintings and information about the fairies that was kept hidden in a private collection at the local library, as well as a mural in the room where the fairies are depicting a child being taken.
Alex (Guy Pearce), Sally's (Bailee Madison) father, at first refuses to believe anything until he finally believes and attempt to escape the house. The fairies catch on to their plan and knock out Alex in the garage as well as knocking Kim unconscious to capture Sally. Sally is tied up and gets dragged down to the basement, and Kim wakes up again, just in time to try and free Kim. The leader off the fairies orders the rest to attack Kim from setting Sally free.
Alex wakes up in the garage and manages to break out, only to be held back by fairies a couple of times and finally reaches the basement. Kim manages to cut the ropes off Sally only to be caught in another rope and gets dragged to the ash pit where the fairies come from. The rope around her leg causes her shin to break, causing her to fall to the ground and get dragged into the pit just as Alex finally reaches the basement. Sally kills the leader of the fairies. Kim is lost while Sally and Alex escape.
Time passes, and Alex and Sally re-visit the house. Sally leaves a drawing of her and Kim holding hands. and they finally leave the house. The door leading to the basement opens and a gust of wind drags the drawing down to the ash pit and the fairies begin whispering and you hear Kim whispering as well. It is assumed that the leader of the Fairies was Blackwood, and since he was killed, Kim becomes the new leader as they wait for the next family to move in and take their children.