Mu advise : every SSH user must have it's own home directory and he must be the owner (of the root .dir file).
Then, whatever the privs, the SSH2 dir will be created correctly.

Also check the doc of what the protections must be because some SSH product require that a certain value is applied and it will NOT tell you that it needs a certain setting. It will simply give an error message that you don't understand (as the one you got).

Without google we would be totaly lost in this open software stuff.

fwiw

Wim