"I have heard it said that the story ... was fiction created by Josephus."
Possibly. The striking similarity of the Masada tale and his own story (a a Jewish general, he and other rebels took refuge in a cave and took a suicide pact; for some reason, he survived) has raised some eyebrows.
However, it is the only account extant, so it's the one we have to deal with. It is not a notably sympathetic account of the Zealots and pictures them not only as doomed but as murderous raiders of other Judean villages.
Josephus has the distinction of being hated by the Jews in rebellion (who considered him a traitor) and mistrusted by Romans. Did that color his history? Possibly; but much of what he writes
As a historian he is generally ranked among the better classical writers, such as Herodotus, Thucydides and Tacitus, which is pretty good company. (I would rather read Josephus than Herodotus, BTW. Fewer elements of the fabulous.)
Historian Shaye Cohen has analyzed the Josephus account of Masada:
"I conclude, then, that Josephus attempted to be reasonably accurate in matters which were verifiable by Silva and the Romans. He refrained from inventing glorious military actions for the Sicarii, and, we may assume, had some basis in fact for the ascription of murder-suicide to them. At least some of the Sicarii killed themselves rather than face the Romans. This fact was exaggerated and embellished. Silva could not object — Livy had done worse.
We do not know what happened on the summit of Masada on the fifteenth of Xanthicus in 74 CE. The archaeological discoveries of Professor Yadin show that Masada was besieged by the Romans in the fashion described by Josephus, but they do not tell us how the defenders of Masada were killed. For this and for all the other details of Masada's history, we are dependent upon Josephus alone.
... Sitting in his study in Rome, Josephus improved on this story. He wanted Eleazar, the leader of the Sicarii, to take full responsibility for the war, to admit that his policies were wrong, to confess that he and his followers had sinned, and to utter the blasphemous notion that God had not only punished but also had rejected his people. Condemned by his own words, Eleazar and all his followers killed themselves, symbolizing the fate of all those who would follow in their footsteps and resist Rome. This was the work of Josephus the apologist for the Jewish people and the polemicist against Jewish revolutionaries. Josephus the rhetorical historian realized that the murder-suicide of some of the Sicarii at Masada would be far more dramatic and compelling if it became the murder-suicide of all the Sicarii. (Many historians before Josephus had similarly exaggerated collective suicides.) Josephus modeled the Masada narrative in part on his own description of the Jotapata episode, in part on the Greco-Roman historiographical tradition. Inspired by the former, he gave Eleazar a second speech, an antilogos to the speech which he claimed to have himself delivered at Jotapata, and invented (or exaggerated) the use of lots in the suicide process. Inspired by the latter, he had each Jew kill his wife and children (a motif derived from Greco-Roman stories of one pattern) and contribute his possessions to one large pile which was then set ablaze (a motif derived from stories of another pattern). Most important, Josephus learned from the (Greco-Roman tradition that collective suicide was to be an object of amazement, almost admiration, an attitude he failed to reconcile with his condemnation of the Sicarii. Out of these strantis-historical truth, a fertile imagination, a flair for drama and exaggeration, polemic against the Sicarii, and iliterary borrowings from other instances of collective suicide-Josephus created his Masada story."
From "Masada, Literary Tradition, Archaeological Remains, and the Credibility of Josephus," by Shaye Cohen in the Journal of Jewish Studies, Spring-Autumn 1982.
A complicating factor in analyzing Josephus' works is that there may have been emendations to the latter parts, including the Testimonium Flavianum, the only First Century reference to Jesus in secular literature. It has widely been argued to be a later addition (by a Christian.)
