You have to create the directory then tell the UBB the full server-side path to the directory as well as the web based path.
Example; if your user home is "/home/gremelin" and your forum is installed in say "public_html/forums" and you put the avatar directory under that you'd have to tell the UBB that it's at the location of "/home/gremelin/public_html/forums/avatars" as well as chmod that folder 777 so that files can be created in it.
