SSH but not SFTP

[ductiletoaster]

Alright, I just setup a new Ubuntu 12.04 LTS server with a LAMP stack + Including OpenSSH server.

This users directory is located...

/var/www/vhosts/test.com/

Where the name of the user is test
I created this user via...

useradd test
passwd test

Now I also changed the users shell to bash after i realized that it was defaulted to sh.

Once I had setup ssh and the users home directory I then tried to sftp in with the users creds to no avail. (I have confirmed SFTP does work for root)

So my question is how can I activate sftp for this user?

I just checked the auth.log and found the following

Jan 12 00:44:26 TC1 sshd[4814]: error: Could not load host key: /etc/ssh/ssh_host_ecdsa_key
Jan 12 00:44:26 TC1 sshd[4814]: Accepted password for TEST from XX.XX.XXX.XXX port 60247 ssh2
Jan 12 00:44:26 TC1 sshd[4814]: pam_unix(sshd:session): session opened for user TEST by (uid=0)
Jan 12 00:44:27 TC1 sshd[4826]: subsystem request for sftp by user TEST
Jan 12 00:44:27 TC1 sshd[4814]: pam_unix(sshd:session): session closed for user TEST

Further research as uncovered the following thread on another site...
http://www.unix.com/linux/161311-use...my-server.html

After I too tried to manually run the sftp-server I get the following error

Couldn't open /dev/null: Permission denied

ls -l of /dev/null shows

crw------- 1 root root 1, 3 Jan  8 14:40 /dev/null

I am wary to change anything until i get confirmation that this indeed is the issue as the above link suggests