The Greeks and certainly the Romans understood perfectly well that the fabled places of the Homeric Poems and other stories were, well...fables. That Homer's settings were at best allegorical and under different names and at worse totally fabricated was generally understood, and there was some debate over what Homer's terms referred to. Some authors thought Ogygia, for example, was Crete, or parts of Italy, an island beyond the Pillars of Hercules--a couple authors even write of Ogygia as being the same place as Aeae, although in Propertius' case maybe it's just poetic license (Ogygia doesn't fit into the meter there). Eratosthenes, however, apparently began his Χρονογραφίαι with a lengthy attack on the idea of trying to gain geographical knowledge from Homer, even though he began the work with the capture of Troy.