dougmac - My parents own a home that's situated just like yours. Before they bought it, the guy they bought it from, wanted to split the property almost exactly like yours is. They really wanted the house, and didn't need a huge yard (they're retired), so the yagreed. The guy who originally owned it, built a house in the back (like your neighbor's). Fortunately, they've never had any problems with the folks who ended up buying the house in the back. I guess it's ok for some, but I'd never want to live in someone else's backyard.
I just watched a show about two neighbors in CA who couldn't get along. I can't for the life of me remember the names now but one family (husband/wife) ended of getting shot by the old guy next door. Point being, these neighbor things can get way out of hand.
I saw that too!
It was on late at night, and I stumbled onto it. Funny thing was, I had been in Monterey California, for work back in April, and that's real close to where that happened.
The sad part is, it sounds like both families were pretty sensible and reasonable (all else considered), but it just got out of control. Both home-owners were in their early 60's (IIRC). One was a retired professor, and the other was maybe a retired small-business owner. Basically, not white-trash. Things just got out of hand over several months.
Anh this sort of thing probably happens frequently across the US. Too bad, because we put so much into our homes and property. It's always best to work things out, but sometimes it's difficult.