StackExchange explains the application using Wifi Positioning Systems (WPS):
The Mac can use Wi-Fi network identification for localization. This is called a Wi-Fi Positioning System (WPS). The access points name and signal strength is determined and looked up in a database to identify the location. The more access points are found, the more precise the localization. Unlike GPS (Global Positioning System) or cell-tower triangulation (together called Assisted-GPS), the Wi-Fi based localization works well inside buildings. There are different databases which collect wireless access points: Google, Navizon, Skyhook Wireless, OpenWLANMap.I have been pretty lucky that WPS pointed me to a single house. Now that all my devices are safely at home, the online version of Find My Mac places all devices in the shed in the backyard, on the border with my neighbors. I probably would not have known which house to send the SJPD to. ... unless I used the iPad/iPhone version.
I did discover that using the web-based version of Find My Mac is less accurate in pin pointing the device than using the Find My Mac application on an iPhone or iPad. On my iPad the application actually shows the address and can provide driving directions (which using Apple Maps may or may not lead you to the right location, but that's another story).
Note: At home WPS triangulation does work thanks to the neighbors networks. I actually do not broadcast my SSID. I thought this was a good security measure: if you do not know my network is around, you are not going to try to connect to my network. As this article points out, hiding your SSID isn't such a great idea for security reasons.