Poindexter, whom everyone calls “Fool” because of a tarot card reading his older sister Ruby did for him, lives in the ghetto of Los Angeles. Fool learns that he and his family have been evicted from their apartment by their landlords, the Robesons. Leroy, an acquaintance of Ruby, offers to help Fool provide for his family by planning a joint burglary of the Robesons' residence, rumored to contain a wealth of gold coins.
Fool agrees to join Leroy and his accomplice Spencer. He also starts hearing disturbing rumors about his former landlords, who are brother and sister. Fool's grandfather, Booker, tells Fool that the Robesons' house used to be a funeral home, and adds that the Robeson family have been incestuously procreating for many years, their offspring becoming increasingly unstable with each generation.
Eventually, the three decide that the best time for their burglary has arrived. They send Fool in, posing as a Boy Scout selling cookies, to try to scout the house out. After unsuccessfully asking to enter the house to use the bathroom he returns to the others. Then Spencer goes in, posing as a municipal worker, but he never returns. Tired of waiting for Spencer, Fool and Leroy finally go in after him and break into the house together. Once inside, they are astonished at the interior: it is a mixture of inexplicably extreme security, old-fashioned décor, and sinister morbidity. The pair is pursued by a vicious dog and Fool ends up in the house's basement. Fool discovers the murdered body of Spencer, along with cannibalistic inbreds corralled under the stairs like animals. While exploring, the Robesons return home, catching the intruders in the act. They shoot and kill Leroy and then begin dancing around his body while Fool hides and watches in terror.
While searching for an exit, Fool meets a young girl named Alice, the embodiment of innocence and purity. Alice tells Fool that her “parents” (the Robesons) searched for a long time for perfect children. She tells him that the only way to survive in the Robesons' world is to “hear no evil, see no evil, and speak no evil.” The “creatures” Fool had previously seen in the basement are boys whom the Robesons call the “people under the stairs” who have had their eyes cut out, their ears cut off, and their tongues torn out as punishment for breaking these rules. They are subsequently locked away forever in the cellar, fed scraps of human flesh from murdered people who discovered the Robesons' crimes. One of these boys, a mute named Roach, previously found a way out and has been hiding in the wall cavities ever since, becoming Alice's only friend. The Robesons refer to him as “that thing in the walls,” and occasionally shoot at him with a shotgun.
Alice and Roach help Fool escape through the rafters and walls of the building. Alice is left behind to be punished for her role in helping Fool escape, and Roach is killed, but not before giving Fool several gold coins and showing him the way out of the basement. Upon escaping, Fool promptly dials 9-1-1 from a pay phone and reports that child abuse is occurring at the Robeson's home. The police soon arrive at the Robesons' and are welcomed by an expert charade of a perfect family. The police, satisfied that no abuse is occurring, promptly leave.
Fool sneaks back into the house just before the police leave, to save Alice from her miserable existence. Anticipating Fool's return, the couple ambush him, but Fool manages to get to the attic and frees Alice. Some “People Under the Stairs” break loose from under the stairs and attack “Mom,” who meets her end at Alice's hands. Fool is promptly met by the shotgun-toting “Dad,” who is clad in full leather BDSM gear, distraught at finding his now-mutilated sister. Fool's plan, aided by the man's supply of explosives in the basement, eventually succeeds, and as “Dad” is blasted into (and out of) several walls, Fool and Alice escape with a dozen children who have been kept under the stairs.
As for the collective money belonging to the bizarre couple, it is blown out of the house through the chimneys and is taken by the tenants, who had all been cheated of their money, as the People Under the Stairs flee into the night.
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