I think you are very close to it here. There are two more settings that you should update to fix this part.
Both of these updates are going to be in the HTMLEditor > editor > plugins > kfm > configuration.php file. In here look for the following settings and adjust them like this:
near line 52
$kfm_userfiles_address = '../../../../../../<your webroot folder>';
near line 83
$kfm_workdirectory = '';
Once you set these like this it should be looking in the root of your site for the files when you browse the server. Now you will still get a similar error if you do not have write permissions on this directory. You will need to adjust the permissions on this directory if you get the error about making it writable again.