There is a problem with the 'Select By Layer By Location' tool. It doesn't add selection to the original feature layer. Instead It generates a new layer called ".._Layer1" which shows on the map, but not recognizable by the Python script. It looks like a bug to me. I've seen some earlier posts related to this issue, but apparently it has never been addressed.
What's interesting is that 'Select By Location' icon which appears on top opens a different tool called 'Select By Location'. This tool does what it's supposed to do, but I can't find it in the list of tools and can't use it in my Python script.