Grandpa Hugo died before the events of the movie.Grandpa Hugo was supposed to be in the film, but his actor, Dennis Fimple, passed away, so Rob Zombie wrote him out of the sequel out of respect. The most obvious explanation for his absence is that The Character Died with Him and Hugo passed of natural causes.
Dr. Satan and the Professor die in the house fire.They were prominent characters in the first film but they don't appear at all in this one, and no mention is made of their fates. It's possible that they were simply Killed Offscreen, along with all of their mutants, when the house caught fire.
The ending of the movie was the Firefly family's Dying DreamThey really died when they were being tortured and killed by Wydell. The showdown with the police could be interpreted as their way of wanting to go out in a blaze of glory.
- Jossed. 3 From Hell pretty much confirmed that the 3 not only escaped the burning house, but that they survived their showdown in the process.