Because I LOVE Tennessee and cowboys, I set my story in the Smoky Mountains. I also have a story set in Texas (Again, cowboys! But the story has nothing to do with them). A current story is set in NY and RI (what I know).
I look at a map of the state and find an open area. Example, the Smoky Mountains is close to Knoxville, but there isn't anything on the map east of that city. This way I can create my own little world and not have to worry about making "mistakes" during research. The same goes for the other stories, I create my own little world apart from the "reality" of that city/town.
Tell us how you come up with a setting for your story? Do you write what you know? Or do you use the internet to get as close to a description as possible?