There's nothing wrong with making stuff up for the sake of a good story: several contemporary detective series that I enjoy have entire towns and villages added to Devon, Derbyshire and Yorkshire respectively. In all three series, however, the 'new' details fit almost seamlessly into what's there in reality. I notice when the change occurs, if I'm familiar with the real life locations, usually commenting that the characters should have fallen off the hillside at this point, but instead have entered 'Alternate Derbyshire'.
The difference is knowledge: these writers know the locations very well, and their made-up additions could exist if the countryside were just that little bit bigger. The houses are made of the same stone or brick as houses in the surrounding real villages, and the inhabitants act in the same ways as those in the real locations. The writers also know their history: an event that really occurred in one or more places is tweaked to fit their imaginary location, but without drowning the reader in unnecessary exposition that doesn't carry the story along.
When I wrote The Monitors I drew on research I'd undertaken for a number of unfinished and unpublished stories. I can store up a lot of facts in my head, and recover them with only a small amount of prompting. Plus I never throw away books that may come in useful again, and some facts are easily verified with a brief websearch. Some other story ideas, however, require extensive research before and during the writing and editing processes.
Right now I have three Ordnance Survey maps ready to be spread out so I can pick the location of my imaginary stately home, I have visits planned to Sheffield Manor Lodge and Kelham Island Museum (the former to get an idea of layout, the latter to establish whether a Sheffield Simplex car could be stored below-stairs in a house based on the former), and I'm building up a collection of books and website links covering topics that include the semi-recent history of Chatsworth House and its estate, women's attitudes to sex and sexual fantasies in the 1970s, the yearly tasks of a Derbyshire farmer, and the timeline of the UK's 1976 drought.
I've also been asking lots of random questions. darkfloweruk was particularly helpful in giving me the confidence to write about a solitary black woman in a small village, and various other friends and fellow writers haven't been slow to point out if I've forgotten a vital historical event in figuring out what my characters might be doing when. They have also been most helpful in offering to lend or track down books, and offering personal recollections of other minor details that will come in handy once I start writing.
How about you? Can you read a book that you know to be wrong about vital facts? Does it depend on the skill of the writer or the depth to which the story engages you? What errors can you never tolerate no matter how great the author and story?