My mother is always seeing other people with us. After we have been out in the car she is always looking for the other people to come in the house. She thinks she is in a nursing home and will ask why did everyone leave her and she is still here. Sometimes while we are setting together in the room, she will see groups of people walking through the wall going someplace.
Delusions are even more common. My mother has many of them, such as the house being up on stilts and air blowing through cracks in the floor... or the front yard being a mud hole even though we're in drought. You can't argue with them, because they are so real in their mind.
After being with my mother almost 7 years I've began to wonder if delusions could be based on something in their lives. For example, my mother was a poor country girl whose house was supported with blocks at the four corners. The floor was simple -- boards nailed to the frame of the house. What she thinks for her present house could have been true for her childhood home. For your mother, I wonder if she has thought about having to go to a nursing home, so to her it has become part of her reality. Although delusions usually make little sense, they are easier to understand. Hallucinations are more difficult. They are like the brain playing tricks. Is she alarmed by them or accept them as okay?
Delusions and/hallucinations can occur without dementia, but since your profile says that your mother has dementia, it seems likely they are part of her disease.
Your mom thinks she is in a nursing home. My husband thought he was in a train station or a hotel.
If what Mom sees or believes is not disturbing to her, don't try to talk her out of it or argue about it. Go along with it as best you can. "I think many of the other residents have already gone to bed, Mother. Shall we go into your room and get ready also?" Or, "I think those people leaving now are visitors and day shift people. Things get quiet around here in the evening."
My mother lived with my sister for a while, and to give caregiving sis some respite and also to be able to spend time with Mother, Mother spent 3 days a month with me and with one other daughter. The first time she came to visit me she was very confused. She asked why Dad didn't come in with her. Hmm ... my Dad had died many years earlier. I tried to explain who had brought her but she insisted that Dad rode with them. So I told her that he was having a poker weekend with his friends, and she and I were having a girls' weekend. She wanted to call him. I told her they were going to rotate which house they were at so he didn't give me a phone number, but that he had mine and would call if he needed anything. (Talk about creating a story on the fly!) This calmed her enough that she stopped fussing about it and we had a fairly normal visit that day. In fact, the next day we could talk a little about the fact that we were both widows.
In these situations, don't worry about "the truth." Assure your mom that she is safe, that the situation is OK, that there is nothing to worry about, that you can handle any problems, etc.
Also mention this development to the doctor who monitors her dementia.