Two concerned relatives walked into the apartment at the Wagner Houses on E 124th St, after they did not hear from 76-year-old Cora Davis for two days.
They opened the bedroom door to find her grandson Larry Davis, 21, having sex with a 20-year-old woman on the bed.
"Where's Mama? Where's Mama?" the New York Daily News quoted sources as reporting a relative asking Davis.
An argument started and one of the relatives threatened to call police, following which Davis ran off, while the woman he was having sex with - who has a prostitution bust on her record - stayed behind.
Cops arrived and searched the apartment, finding Cora's body crammed in the bedroom's closet under a pile of clothes.
The city medical examiner was trying to determine the cause of death, and sources said investigators found signs of haemorrhaging around her eyes that suggest she may have been strangled.
Law enforcement sources said there were several domestic incident reports filed at the home, but none involved violence. The elderly woman also had an order of protection against her grandson.
"It's just a horrible thing because she was a lovely lady. She didn't bother anybody," close friend Dorothea Sadler, 81, said.
Larry, who is still being sought by police, has prior arrests that include drug possession and assault.
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