An interesting point came up in a recent piece of correspondence with Chris Baker... the idea of superimposing a fictional geography onto an existing region, thus making the whole question of location a lot simpler. Chris has done this with 'Much Meddling', choosing an area south-west of Gloucester in the Forest of Dean and then simply making up a route and the various places around and along it, without too much concern as to whether it fits into the actual geography of the area and existing/historical rail network, beyond the main routes and larger centres of population at least. I like the idea of this a lot, as it provides much greater scope for the imagination and creative freedom (although the other side of the coin of course is that you have to work harder to establish a convincingly coherent scenario with building styles, landscape etc., but I think that's a price I'm happy to pay).
I suppose at the end of the day there are no rules here. It's whatever works for you. Horses for courses. If you can't abide the idea of modelling anything short of a precise actual location in all its prototype details, then good for you. If you're happy to create a total fiction based on nothing like any prototype that ever existed then go for it! Personally I fit somewhere in between the two extremes. If I could find an actual location that met all the criteria for a perfect layout in the available space then I might be prepared to follow that route. But as it is I haven't, so I'll let the creative juices get to work!