The grandparents are possessed by something.
Grandma definitely acts possessed in a few scenes: clawing at the walls, staring at the kids, laughing at nothing...- Jossed. The grandparents actually are imposters who killed the real grandparents and are mentally insane.
The grandparents aren't possessed.
Something caused them to snap. The mom is in on the whole thing.
Either she left the kids with her crazy parents deliberately to get rid of them, or her parents have always acted this way and she considers it normal.- Jossed. In the scene where the kids talk to their mom via Skype and tell her something wrong, they hold the laptop up to look out the window. When they bring the laptop back down, the mom says that's not Nana and Pop Pop and asked where they were. Then the realization comes through on her face that her children are with strangers at her parents house and attempts to try to call the local law enforcement with no luck. The way she acts is a clear sign that she is panicked and that its not her parents.
The only reason this is being marketed as a "horror-comedy" is because of the Narm/So Bad, It's Good reactions his recent films have gotten.
So if they make it look like they were not taking it too seriously and being ridiculous on purpose, maybe people would be more willing to accept the sillier parts of the story. Grandparents are related to some of well-known fairy tale witches
Grandma asks her granddaughter to come in oven to clean it. Kids often trick witches into coming in oven in tales, so she decided to learn from her cousin's mistakes but just couldn't resist irony. The kids are in no danger whatsoever.
The entire thing is a really cruel prank being played on them by their mother and grandparents - or the kids are utter brats and this is a Scare 'Em Straight ploy.- Jossed. What kind of point of a prank would there be when the kids end up killing the imposters at the end of the film while trying to defend themselves?
Combo theory
At first it would just like the above WMG of the though thing being staged by the grandparents and the mother as either an elaborate cruel prank and/or a Scare 'Em Straight ploy, but things start going horribly wrong when one of the grandparents, most likely the grandmother, actually does start going homicidaly insane and try to kill the kids for real, forcing the remaining grandparent to come to the rescue. Afterwards it would show that the murderous grandparent was suffering from a disgenerative mental disorder that they literally told no one in order to keep up appearances and to be able to see the grandchildren.- This one turns out to be closest to the truth. It's not a prank or Scare 'Em Straight ploy, but all the weirdness is just regular human madness, with nothing supernatural about it. The only thing it gets wrong (and that M. Night wisely kept out of the trailers) is that the grandparents aren't the grandparents.
The film is a modern version of Hansel and Gretel
Brother and sister? Check. Creepy old woman (and her husband)? Check. Instructing one of the kids to get into the oven? Oh come on, how much more obvious can you get!?