The film opens in 1960 in a mental hospital, where we meet Alex West. Alex is a sad little boy with no friends or family, who was sent there after having a violent and traumatic childhood after he killed his abusive father. Alex then meets Norman Bates, who becomes a father figure to him. Fast-forward 27-years later, Norman Bates has recently died and Alex (now played by Bud Cort) has also been released from the hospital as well. He's very scared about being released into the world for the first time in 27 years. But he soon finds out upon the reading of Norman's will that he has just legally inherited the Bates Motel! Alex at first has difficulty finding it as he tries to find the small California town of Fairville, but on the road, he then bumps into a man named Henry Watson (Moses Gunn) who offers him a ride. When Alex gets there, the old decaying house and motel are more dilapidated than he could have imagined. After spending an uneventful night at the motel, he decides to go to the bank for a loan so he can have the motel repaired. When Alex arrives at the Fairville bank, the bank officer Tom Fuller (Greg Henry) reluctantly gives him the money needed to fix up the motel, and becomes suspicious of Alex's presence in town.
When Alex arrives at the house later that night, he finds a squawker named Willie (Lori Pretty) who's apparently been living there for free in the last few months. Willie is an annoying, mood swinging, tough girl, and a teenage runaway, who doesn't exactly appreciate having Alex move in even though he does legally own the property now. He finally gets her to leave, only to have her come back later apologizing and asking him to let her help him reopen the motel in exchange for a place to stay. Alex also finds out that Henry, the man that gave him the ride to the motel in the first place, has just lost his house. Alex offers him a job to help fix the motel in exchange to live there as well. Henry accepts Alex's offer and soon begins working on the project. But one day, to their horror, they discover the body of Mrs. Bates underneath the ground! Apparently, her body was never found.
At Mrs. Bates burial, Alex sees a frightening apparition of a mysterious lady in black watching the funeral from a distance. The figure disappears just as fast as she had appeared, and no one else has seen her besides Alex. The next morning, Alex runs into Mr. Fuller who tells Alex more about the history of the Bates family. It seems Mrs. Bates' husband mysteriously disappeared one day, and she was often seen wearing a mysterious black dress afterwards as if she was in mourning. When Alex later arrives at the motel, it seems they've run into a new problem: They've now found the body of Mr. Bates in the ground! Feeling very creeped out and not being able to sleep that night, Alex goes outside, where he sees an apparition of Mr. Bates' dead body. Now scared out of his mind and believing that the motel and the grounds are haunted, Alex runs away until he bumps into Willie. She finally manages to calm Alex down and get him to sleep.
After all the excitement finally calms down over the next few months, Alex finally has the reconstruction finished and the motel is now officially reopened for business. There is a large water fountain in the parking lot as well as a new building right next to the motel which serves as an eatery and Henry is the cook, while Willie works as a waitress and dishwasher, with Alex also there to help out. But Alex confides in Willie that the bank officer, Mr. Fuller, has given him until tomorrow to pay back the rest of the loan that was given to him two months earlier to rebuild the motel, and he refuses to give him an extension.
On opening night, a woman named Barbara Peters (Kerrie Keane) stops by to rent a room. Alex is excited, but what he doesn't know is that Barbara is actually a very depressed woman planning to commit suicide in her room. Later that night, a huge group of rowdy retro-looking teenagers stop at the motel and the motel is now booked solid! In Barbara's room though, just as she is about to cut her wrists, one of the teenage girls from the other rooms enters into her room by mistake. The girl, seeing that Barbara is a very sad woman, invites her to come to a party with them at the motel's restaurant. Barbara reluctantly accepts the young girl's offer but still has a nice time at the party that night. When Barbara arrives back at her room though, she proceeds again to end her life. To her horror, she is again interrupted be the same girl who materializes in her room! However, this time the girl knows what she was about to do. She also knows that her real name is actually Sally and the pain she has been through that has brought her to this point. The girl then tells Sally that she and all the other teenagers that were at the party that night are actually the ghosts of people who have committed suicide over the past 30 years and that they've come to help her realize how much she has to live for.
Later that night, as Alex is cleaning outside the motel, he suddenly sees the apparition of the woman in black in the window of the house. As he bursts through the front door, he is confronted at the top of the stairs by none other than Mrs. Bates herself!!! Mrs. Bates attacks Alex with a butcher knife and orders him to leave her house immediately. Henry then comes in to save the day by wrestling off her mask, revealing her to be actually Mr. Fuller. Mr. Fuller doesn't care that he's been caught though, since he says he's confident that no one will believe them. But just then, the "real" ghost of Mrs. Bates bursts into the room with a butcher knife!!!! After making Tom Fuller confess what he's done by attacking and scaring him, she reveals herself to actually being... Willie in disguise this time! Not only she has his confession recorded on tape, Willie blackmails Mr. Fuller into giving Alex more time so they can repay the bank loan, and forces the double-crossing banker to leave them alone. Beaten but not defeated, Mr. Fuller leaves the area, vowing that he will continue to try to evict Alex and everyone from the area.
The next morning, Alex bumps into Sally/Barbara as she is leaving the motel. And the two of them talk about what a beautiful day it is and just how lucky they are to be alive to see it.
But as the camera pans down on Alex, pulling back slowly as he calls farewell to the departing ghost guests,
the tire tracks from the previous night made from Mr. Fuller's car forms part of a question mark on the
parking lot as Alex stands where the dot is supposed to be...