Many filmmakers choose to shoot on location to avoid the cost of building their own sets. On location simply means that they are shooting at a location that was already there, a real home, street or location. However, even though there is usually no building required, the set design and set decorator will work together to make the location look the way they want. Sometimes this means as little as putting leaves all over the lawn, or as extreme as painting the building and fabricating a huge neon sign.
On the sound stage, a filmmaker can control everything, including the weather. When working on a sound stage, the set designer will need to build the entire set from the ground up. Sometimes, entire houses are built on stage. One of the perks of building sets on the stage is that the set designer can build break away walls, allowing the filmmaking crew to shoot from any angle into a room.
The backlot of most studios is a magical place. A mix between on location and a sound stage. The weather can't be controlled, but filmmakers can build whatever the like in an outdoor location. At the Universal Studios backlot, a famous city center still stands. The court house and the park directly in front of it were changed and built in several different ways to show different times in all three of the Back to the Future films.
When a filmmaker wants absolute control or wants something that is technically impossible to build, they turn to the digital world of set design. Building worlds like Pandora from James Cameron's Avatar would be nearly impossible without the ability to generate it in a computer. This gives the set designer complete control and requires much less physical labor. There are no limits when building a digital world, making it possible to make places that we could only imagine.