Yes, exactly. You can always add to the GE terrain (although you may risk your model being rejected if you do this too excessively) but cannot "subtract" from the terrain. Or you can but as the GE terrain will be inevitably above it, you won't be able to see it. So the workaround is to add to your terrain, paint it with the colour GE snapshot and subtract from that piece down to the limit of the original terrain.

It is in the main menu too ? The context-menu varies with the selection, and it is replicated in drop-down menu associated with the last item in the Edit menu. The title of the last item will vary depending on the selection - here, for a group it'd say 'Group' etc - like Entity Info does...

Hi, Nenad! I think it´s telling you that you have reversed normals - there should be no " blueish" faces, so you ´ll have to flip them ( right click - reverse faces). In other words, I think you have the back face of the wall ( the blue one) facing forward. Oh, and welcome ( dobro dosao )