Hi seanmcel
Let me take an example, if you override login module in local folder:
/templates/ja_template/local/html/mod_login/
This folder will be used in priority on frontend, if this login module is not overridden in local folder, the folder in template will be used:
/templates/ja_template/html/mod_login/
When you compare in JAEM, JAEM will compare files in new version vs files in existing version your site is using, not the files in local folder. So, basically, when you customize this login module and put changes inside local folder, it will not be affected when you update new version of template. That's initial idea of using local folder in template.
I hope this makes senses.