An interesting story. Most evil painting stories end up with the creep little girl murder-izing everyone or at least trying to, so it's nice to read something that takes a turn away from the usual. You do a good job of not rushing the punchline. The phone call between Chelsea and her Grandma, for instance, could easily have been cut down to just Grandma saying something and Chelsea suddenly freaking out, but you gave it time to breath and develop.
My only complaint is that you sometimes get a little wordy. "she would angrily castigate him", for example. Castigation is already a harsh act, so doing so angrily is a bit redundant.
However, all told, it was a fun story. Good luck in the contest.
As for the basis in truth, is this your story or did someone else tell it to you?