WARRANT AGREEMENT dated as of November 12, 1996 between FAC Realty,
Inc., formerly Factory Stores of America, Inc., a Delaware corporation (the
"Corporation"), and National Union Fire Insurance Company of Pittsburgh
("Warrant Holder").

                              PRELIMINARY STATEMENT

         The Corporation proposes to issue and sell to Warrant Holder pursuant
to the Note Purchase Agreement 20,000 Warrants, each Warrant representing the
right initially to purchase one share of Common Stock. The Corporation and
Warrant Holder desire to set forth in this Warrant Agreement the terms and
conditions of the Warrants to be issued pursuant to the terms of the Note
Purchase Agreement.

         Accordingly, the parties hereto agree as follows.

1.       DEFINITIONS. As used in this Warrant Agreement, the following terms
         shall have the following meanings, unless the context otherwise
         requires.

         (a)      "AGGREGATE CONSIDERATION RECEIVABLE" by the Corporation in
                  connection with the issuance of any shares of Common Stock (or
                  any rights, warrants, options or convertible or exercisable
                  securities entitling the holders thereof to subscribe for or
                  purchase any shares of Common Stock or any stock appreciation
                  rights entitling the holders thereof to any interest in an
                  increase in value, however measured, of shares of Common
                  Stock) means the sum of:

                 (i)       the aggregate consideration paid to the Corporation
                           for such shares, rights, warrants, options or
                           convertible or exercisable securities and

                  (ii)     the aggregate consideration or premiums stated in
                           such rights, warrants, options or convertible or
                           exercisable securities to be payable for the shares
                           of Common Stock covered thereby,

                  calculated in each case in accordance with section 11(f)
                  hereof. In case all or any portion of the consideration to be
                  received by the Corporation may be paid in a form other than
                  cash, the value of such consideration shall be determined in
                  good faith by the Board of Directors or a duly authorized
                  committee thereof (irrespective of the accounting treatment
                  thereof), and described in a resolution of the Board of
                  Directors or such committee.

         (b)      "BLACKACRE" shall mean Blackacre Bridge Capital, L.L.C., a
                  Delaware limited liability company.

         (c)      "BOARD OF DIRECTORS" shall mean the board of directors of the
                  Corporation.

         (d)      "BUSINESS DAY" shall mean a day other than a Saturday, Sunday
                  or other day on which commercial banks in New York, New York
                  are required by law to close.

                                                        -1-

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         (e)      "CAPITAL STOCK" shall mean any and all shares, rights to
                  purchase, warrants, options, convertible securities,
                  participations in or other equivalents of or interests (other
                  than security interests) in (however designated and whether
                  voting or nonvoting) corporate stock.

         (f)      "COMMON STOCK" means the Common Stock, par value $ 0.01 per
                  share, of the Corporation and, in the case of a
                  reclassification, recapitalization or other similar change in
                  such Common Stock or in the case of a consolidation or merger
                  of the Corporation with or into another Person, such
                  consideration to which a holder of a share of Common Stock
                  would have been entitled upon the occurrence of such event.

         (g)      "CORPORATION" means FAC Realty, Inc, a Delaware corporation.

         (h)      "EFFECTIVE PURCHASE PRICE PER SHARE" at which the Corporation
                  issues any shares of Common Stock (or any rights, warrants,
                  options or convertible or exercisable securities entitling the
                  holders thereof to subscribe for or purchase any shares of
                  Common Stock or any stock appreciation rights entitling the
                  holders thereof to any interest in an increase in value,
                  however measured, of shares of Common Stock) shall mean an
                  amount equal to the ratio of:

                  (i)      the Aggregate Consideration Receivable by the
                           Corporation in connection with the issuance of such
                           shares of Common Stock (or any such rights, warrants,
                           options, convertible or exercisable securities or
                           stock appreciation rights) to

                  (ii)     the number of shares of Common Stock so issued (or
                           issuable upon the exercise or conversion of such
                           rights, warrants, options, or convertible or
                           exercisable securities or the Common Stock
                           equivalent, as nearly as it may be calculated, of
                           such stock appreciation rights).

         (i)      "EXCHANGE PRICE PER SHARE" shall mean the $8.41, as such
                  amount may from time to time be adjusted in accordance with
                  the provisions of section 11 hereof.

         (j)      "EXCLUDED TRANSACTIONAL" means the issuance of any shares of
                  Capital Stock of the Corporation to employees or directors of
                  the Corporation under an employee benefit plan or arrangement
                  adopted by the Corporation; provided, however, in no event
                  shall the aggregate amount of such issuances exceed 10% of the
                  issued and outstanding shares of Capital Stock of the
                  Corporation on the date prior to the date of this Warrant
                  Agreement (calculated on a fully-diluted basis).

         (k)      "EXPIRATION DATE" shall mean April 3, 2003.

         (l)      "FAIR MARKET VALUE" of the Common Stock means, as of any date
                  the average of

                                                        -2-

<PAGE>



                  the daily closing prices of Common Stock for the 30
                  consecutive Trading Days next preceding the date prior to the
                  date in question. The closing price for each day shall be the
                  last sale price, or the closing bid price if no sale occurred,
                  of Common Stock on the New York Stock Exchange for trading.

         (m)      "GILDEA" shall mean Gildea Management Company, a Delaware
                  corporation.

         (n)      "NOTE PURCHASE AGREEMENT" shall mean that certain Note
                  Purchase Agreement, dated April 2,1996, by and among the
                  Corporation, Blackacre and Gildea, as amended.

         (o)      "PERSON" means an individual, a corporation, a partnership, a
                  joint venture, an association, a joint-stock company, a trust,
                  a business trust, a government or any agency or any political
                  subdivision, any unincorporated organization, or any other
                  entity.

         (p)      "SECURITIES ACT" shall mean the Securities Act of 1933, as
                  amended, or any successor federal statute.

         (q)      "SERIES A PREFERRED STOCK" means the Series A Convertible
                  Preferred Stock, $25.00 par value per share, of the
                  Corporation.

         (r)      "TRADING DAY" means, with any day on which the New York Stock
                  Exchange is open for business.

         (s)      "WARRANT AGREEMENT" shall mean this warrant agreement.

         (t)      "WARRANT CERTIFICATE" shall mean a certificate evidencing one
                  or more Warrants, substantially in the form of exhibit A
                  hereto.

         (u)      "WARRANT HOLDER" shall mean Blackacre, as the original
                  registered holder of the Warrants issued hereunder, and any
                  registered transferee of a Warrant Holder.

         (v)      "WARRANT OFFICE" shall mean the office or agency of the
                  Corporation at which the Warrant Register shall be maintained
                  and where the Warrants may be presented for exercise,
                  exchange, substitution and transfer, which office or agency
                  will be the office of the Corporation at 11000 Regency
                  Parkway, Suite 300, Cary North Carolina 27511, which office or
                  agency may be changed by the Corporation pursuant to notice in
                  writing to the Persons named in the Warrant Register as the
                  holders of the Warrants.

         (w)      "WARRANT REGISTER" shall mean the register, substantially
                  maintained by the Corporation at the Warrant Office.

                                                        -3-

<PAGE>



         (x)      "WARRANT SHARES" shall mean the shares of Common Stock issued
                  or issuable upon exercise of the Warrants, as the same may be
                  adjusted from time to time pursuant to section 11 hereof, and
                  any other shares of Capital Stock issued or issuable upon the
                  exercise of the Warrants pursuant to section 11 hereof.

         (y)      "WARRANTS" shall mean the warrants to purchase Common Stock
                  issued by the Corporation pursuant to this Warrant Agreement;
                  individually, a "Warrant."

2.       REPRESENTATIONS AND WARRANTIES. The Corporation hereby represents and 
         warrants as follows:

         (a)      The Corporation is a corporation duly incorporated, validly
                  existing and in good standing under the laws of the State of
                  Delaware, has the corporate power and authority to conduct its
                  business as presently conducted, has the corporate power and
                  authority to execute and deliver this Warrant Agreement and
                  the Warrant Certificates, to issue the Warrants and to perform
                  its obligations under this Warrant Agreement and the Warrant
                  Certificates.

         (b)      The execution, delivery and performance by the Corporation of
                  this Warrant Agreement and the Warrant Certificates, the
                  issuance of the Warrants, and the issuance of the Warrant
                  Shares upon exercise of the Warrants have been duly authorized
                  by all necessary corporate action.

         (c)      This Warrant Agreement has been duly executed and delivered by
                  the Corporation and constitutes a legal, valid, binding and
                  enforceable obligation of the Corporation. When the Warrants
                  and Warrant Certificates have been issued as contemplated
                  hereby. The Warrants and the Warrant Certificates will
                  constitute legal, valid, binding and enforceable obligations
                  of the Corporation. The Warrant Shares, when issued upon
                  exercise of the Warrants in accordance with the terms hereof
                  will be duly authorized, validly issued, fully paid and
                  nonassessable. Statements in this section 2(c) as to validity,
                  binding effect and enforceability are subject to (i)
                  limitations as to enforceability imposed by bankruptcy,
                  reorganization, moratorium, insolvency and other laws of
                  general application relating to or affecting the
                  enforceability of creditors' rights, including, without
                  limitation, limitations as to enforceability that may be
                  imposed under Section 548 of the United States Bankruptcy
                  Code, Article 10 of the New York Debtor Creditor Law or other
                  provisions of law relating to fraudulent transfers and
                  obligations and (ii) equitable principles limiting the
                  availability of equitable remedies.

3.       NUMBER OF WARRANTS. The Corporation hereby agrees to issue and deliver
         to Warrant Holder on the date hereof 20,000 Warrants and one or more
         Warrant Certificates evidencing such Warrants.


                                                        -4-

<PAGE>



4.       REGISTRATION, TRANSFER AND EXCHANGE OF CERTIFICATES.

         (a)      The Corporation shall maintain at the Warrant Office the
                  Warrant Register for registration of the Warrants and Warrant
                  Certificates and transfers thereof. On the date hereof the
                  Corporation shall register the Warrants and Warrant
                  Certificates in the Warrant Register in the name of the
                  Warrant Holder. The Corporation may deem and treat the
                  registered holders of the Warrant Certificates as the absolute
                  owners thereof and the Warrants represented thereby
                  (notwithstanding any notation of ownership or other writing on
                  the Warrant Certificates made by any person) for the purpose
                  of any exercise thereof or any distribution to the Warrant
                  Holders thereof and for all other purposes, and the
                  Corporation shall not be affected by any notice to the
                  contrary.

         (b)      Subject to section 12 hereof, the Corporation shall register
                  the transfer of any outstanding Warrants in the Warrant
                  Register upon surrender of the Warrant Certificates evidencing
                  such Warrants to the Corporation at the Warrant Office,
                  accompanied (if so required by it) by a written instrument or
                  instruments of transfer in form satisfactory to it, duly
                  executed by the registered holder or holders thereof or by the
                  duly appointed legal representative thereof. Upon any such
                  registration of transfer, new Warrant Certificates evidencing
                  such transferred Warrants shall be issued to the transferee
                  and the surrendered Warrant Certificates shall be canceled. If
                  less than all the Warrants evidenced by Warrant Certificates
                  surrendered for transfer are to be transferred, new Warrant
                  Certificates shall be issued to the holder surrendering such
                  Warrant Certificates evidencing such remaining number of
                  Warrants.

         (c)      Warrant Certificates may be exchanged at the option of the
                  holders thereof when surrendered to the Corporation at the
                  Warrant Office, for another Warrant Certificate or other
                  Warrant Certificates of like tenor and representing in the
                  aggregate a like number of Warrants. Warrant Certificates
                  surrendered for exchange shall be canceled.

         (d)      No charge shall be made for any such transfer or exchange
                  except for any tax or other governmental charge imposed in
                  connection therewith. Except as provided in section 12(b)(i)
                  hereof, each Warrant Certificate issued upon transfer or
                  exchange shall bear the legend set forth in sections 12(b)(i)
                  hereof if the Warrant Certificate presented for transfer or
                  exchange bore such legend.

5.       MUTILATED OR MISSING WARRANT CERTIFICATES. If any Warrant Certificate
         shall be mutilated, lost, stolen or destroyed, the Corporation shall
         issue, in exchange and substitution for and upon cancellation of the
         mutilated Warrant Certificate, or in lieu of and substitution for the
         Warrant Certificate lost, stolen or destroyed, a new Warrant
         Certificate of like tenor and representing an equivalent number of
         Warrants, but only upon receipt of evidence

                                                        -5-

<PAGE>



         satisfactory to the Corporation of such loss, theft or destruction of
         such Warrant Certificate (which shall, in the case of a mutilated
         Warrant Certificate, include the surrender thereof) and, if requested,
         indemnity satisfactory to it. The Corporation acknowledges that a
         written indemnity by the Warrant Holder shall be satisfactory to the
         Corporation for such purpose. All expenses and reasonable charges
         associated with procuring such indemnity and all stamp, tax and other
         governmental duties that may be imposed in relation thereto shall be
         borne by the holder of such Warrant Certificate. Each Warrant
         Certificate issued in any such substitution shall bear the legend set
         forth in section 12(b)(i) if the Warrant Certificate for which such
         substitution was made bore such legend.

6.       DURATION AND EXERCISE OF WARRANTS.

         (a)      The Warrants evidenced by a Warrant Certificate shall be
                  exercisable in whole or in part by the registered holder
                  thereof on any Business Day after the date hereof and on or
                  before 5:00 P.M., New York City time, on the Expiration Date.
                  Each Warrant not exercised by 5:00 p.m. New York City time, on
                  the Expiration Date shall become void, and all rights
                  thereunder and all rights in respect thereof under this
                  Warrant Agreement shall become void.

         (b)      Upon presentation to the Corporation at the Warrant Office of
                  the Warrant Certificate evidencing the Warrants to be
                  exercised, with the form of election to purchase attached
                  thereto duly completed and signed by the Warrant Holder, and
                  upon payment of an amount equal to the product of:

                  (i)      the Exchange Price per Share and

                  (ii)     the number of Warrant Shares being purchased,

                  in lawful money of the United States of America, the
                  Corporation shall issue and cause to be delivered to or upon
                  the written order of the registered holders of such Warrants
                  and in such name or names as such registered holder may
                  designate, a certificate for the Warrant Share or Warrant
                  Shares issued upon such exercise of the Warrants being
                  exercised. Any Persons so designated to be named therein shall
                  be deemed to have become Warrant Holders of record of such
                  Warrant Share or Warrant Shares as of the date of exercise of
                  such Warrants.

         (c)      If less than all of the Warrants evidenced by a Warrant
                  Certificate are exercised at any time, a new Warrant
                  Certificate or Certificates shall be issued for the remaining
                  number of Warrants evidenced by such Warrant Certificate. Each
                  new Warrant Certificate so issued shall bear the legend set
                  forth in section 12(b)(i) hereof if the Warrant Certificate
                  presented in connection with partial exercise thereof bore
                  such legend. All Warrant Certificates surrendered upon
                  exercise of Warrants shall be canceled.

                                                        -6-

<PAGE>



7.       NO FRACTIONAL SHARES. The Corporation shall not be required to issue
         fractional Warrant Shares upon exercise of the Warrants but shall pay
         for any such fraction of a share an amount in cash equal to such
         fraction of the Fair Market Value of a share of Common Stock.

8.       PAYMENT OF TAXES. The Corporation will pay all taxes attributable to
         the initial issuance of Warrant Shares upon the exercise of the
         Warrants, provided that the Corporation shall not be required to pay
         any income or other tax incurred by the holder of the Warrant
         Certificate or the Warrant Shares upon exercise of the Warrants or
         issuance of the Warrant Shares.

9.       STOCK RIGHTS.

         (a)      Nothing contained in this Warrant Agreement or in any of the
                  Warrant Certificates shall be construed as conferring upon the
                  holders thereof any right to vote or to consent to or receive
                  notice as a stockholder in respect of the meetings of
                  stockholders or the election of directors of the Corporation
                  or any other matter or rights to receive dividends, or any
                  rights whatsoever as a stockholder of the Corporation.

         (b)      Nothing contained in this Warrant Agreement or in any of the
                  Warrant Certificates shall be construed as imposing any
                  obligation on the registered holders thereof to purchase any
                  securities or as imposing any liability on such Warrant
                  Holders as stockholders of the Corporation, whether such
                  obligation or liability is asserted by the Corporation or by
                  creditors of the Corporation.

10.      RESERVATION AND ISSUANCE OR WARRANT SHARES.

                  (a)      The Corporation will at all times that Warrants
                           remain outstanding have authorized, and reserve and
                           keep available, free from preemptive rights, for the
                           purpose of enabling it to satisfy any obligation to
                           issue Warrant Shares upon the exercise of the
                           Warrants, the number of shares of Common Stock
                           deliverable upon exercise of all outstanding
                           Warrants.

                  (b)      The Corporation will take any corporate action which
                           may be necessary in order that the Corporation may
                           validly and legally issue fully paid and
                           nonassessable Warrant Shares at the Exchange Price
                           per Share.

                  (c)      The Corporation covenants that all Warrant Shares
                           will, upon issuance in accordance with the terms of
                           this Warrant Agreement and the Corporation's
                           certificate of incorporation, be fully paid and
                           nonassessable and free from all taxes with respect to
                           the issuance thereof and from all liens, charges and
                           security interests (other than any created by or on
                           behalf of any Warrant).



                                                        -7-

<PAGE>



11.      ADJUSTMENT OF EXCHANGE PRICE PER SHARE.

                  (a)      Prior to the Expiration Date, the Exchange Price per
                           Share is subject to adjustment from time to time in
                           the manner provided in this section 11 upon the
                           occurrence of any of the events enumerated in this
                           section 11.

                  (b)      In the event that the Corporation shall at any time
                           after the date hereof:

                           (i)       declare a dividend or make a distribution
                                     on the Common Stock payable in shares of
                                     Common Stock,

                           (ii)      subdivide or reclassify outstanding shares
                                     of Common Stock into a greater number of
                                     shares,

                           (iii)     combine shares of its outstanding Common
                                     Stock into a smaller number of shares,

                           (iv)      declare a dividend or distribution on the
                                     Common Stock in shares of any series of its
                                     Capital Stock other than Common Stock, or

                           (v)       issue by reclassification of any shares of
                                     its outstanding Common Stock, shares of any
                                     series of its Capital Stock or obligation
                                     of the Corporation or other property,

                           then the exercise privilege and the Exchange Price
                           per Share in effect immediately prior thereto shall
                           be adjusted so that the Warrant Holder of Warrant
                           Shares thereafter surrendered for exercise shall be
                           entitled to receive the number of shares of Common
                           Stock or other Capital Stock and/or property of the
                           Corporation which such Warrant Holder would have been
                           entitled to receive after the happening of any of the
                           events described above had such Warrants been
                           exercised immediately prior to the happening of such
                           event or any record date with respect thereto. Such
                           adjustment shall become effective immediately after
                           the applicable record date in the case of a dividend
                           or distribution and shall become effective
                           immediately after the effective date in the case of a
                           subdivision, combination or reclassification. Such
                           adjustments shall be made successively whenever any
                           event referred to above shall occur.

                  (c)      If the Corporation shall at any time after the date
                           hereof issue any shares of Common Stock (or any
                           rights, warrants, options or convertible or
                           exercisable securities entitling the holders thereof
                           to subscribe for or purchase any shares of Common
                           Stock or any stock appreciation rights entitling the
                           holders thereof to any interest in an increase in
                           value, however measured, of shares

                                                        -8-

<PAGE>



                           of Common Stock) for an Effective Purchase Price per
                           Share less than the Exchange Price per Share in
                           effect immediately prior to the date of such
                           issuance, then the Exchange Price per Share shall be
                           adjusted to equal the ratio of:

                           (i)      the sum of:

                                    (A)     the product of:

                                            (1)     the number of shares of
                                                    Common Stock outstanding
                                                    immediately prior to such
                                                    issuance and

                                            (2)     the Exchange Price per Share
                                                    in effect immediately prior
                                                    to such issuance and

                                    (B)     the Aggregate Consideration
                                            Receivable by the Corporation in
                                            connection with such issuance to

                           (ii)     the sum of:

                                    (A)     the number of shares of Common Stock
                                            outstanding immediately prior to
                                            such issuance and

                                    (B)     the number of additional shares of
                                            Common Stock to be so issued
                                            (including the number of shares
                                            underlying such rights, warrants,
                                            options or convertible or
                                            exercisable securities).

                           Such adjustment shall be made successively whenever
                           any shares, rights, warrants, options, convertible or
                           exercisable securities or stock appreciation rights
                           are issued at an Effective Purchase Price per Share
                           that is less than the Exchange Price per Share in
                           effect on the date of such issuance. To the extent
                           that any such rights, warrants, options, convertible
                           or exercisable securities or stock appreciation
                           rights expire without having been converted or
                           exercised, the Exchange Price per Share then in
                           effect shall be readjusted to the Exchange Price per
                           Share which then would be in effect if such rights,
                           options, warrants, convertible or exercisable
                           securities or stock appreciation rights had not been
                           issued, but such readjustment shall not affect the
                           number of shares of Common Stock or other shares of
                           Capital Stock delivered upon any conversion or
                           exercise prior to the date such readjustment is made.

                           If the Corporation shall at any time after the date
                           hereof issue any shares of Common Stock (or any
                           rights, warrants, options or convertible or
                           exercisable securities entitling the holders thereof
                           to subscribe for or purchase any shares of Common
                           Stock, or any stock appreciation rights entitling the
                           holders

                                                        -9-

<PAGE>



                           thereof to any interest in an increase in value,
                           however measured, of shares of Common Stock) in an
                           Excluded Transaction the Exchange Price per Share in
                           effect immediately prior to the date of such issuance
                           shall not be adjusted hereunder as a result of such
                           Excluded Transaction.

                   (d)     If the Corporation shall at any time after the date
                           hereof distribute to all holders of its Common Stock
                           any of its assets or debt securities, or rights,
                           options, warrants or convertible or exercisable
                           securities of the Corporation (including securities
                           issued for cash) but excluding distributions of
                           Capital Stock referred to in section 11(b) hereof,
                           then the Exchange Price per Share shall be adjusted
                           to equal the Exchange Price per Share in effect
                           immediately prior to such distribution less an amount
                           equal to the then fair market value (as reasonably
                           determined by the Board of Directors, in good faith
                           and as described in a resolution of the Board of
                           Directors) of the portion of the assets or debt
                           securities of the Corporation so distributed or of
                           such rights, options, warrants or convertible or
                           exchangeable securities applicable to one share of
                           Common Stock.

                           Such adjustment shall become effective immediately
                           after the record date for the determination of shares
                           entitled to receive such distribution. Such
                           adjustment shall be made successively whenever any
                           event listed above shall occur. Notwithstanding the
                           foregoing, no adjustment of the Exchange Price per
                           Share shall be made upon the distribution to holders
                           of Common Stock of such rights, options, warrants,
                           convertible securities, assets or debt securities if
                           the plan or arrangement under which such rights,
                           options, warrants, convertible securities, assets or
                           debt securities are issued provides for their
                           issuance to Warrant Holders of shares of Common Stock
                           in the same pro rata amounts upon exercise thereof.

                  (e)      In any case in which this section 11 provides that
                           shall become effective immediately after a record
                           date for an event, the Corporation may defer until
                           the occurrence of such event:

                           (i)      issuing to the Warrant Holder of any shares
                                    of Common Stock subject to an exercise after
                                    such record date and before the occurrence
                                    of such event the additional shares of
                                    Common Stock issuable upon such exercise by
                                    reason of the adjustment required by such
                                    event over and above the Common Stock
                                    issuable upon such exercise before giving
                                    effect to such adjustment, and

                           (ii)     paying to such Warrant Holder any amount in
                                    cash in lieu of any fractional share of
                                    Common Stock pursuant to section 7.


                                                       -10-

<PAGE>



                  (f)      For purposes of any computations of Aggregate
                           Consideration Receivable or other consideration
                           pursuant to this section 11, the following shall
                           apply:

                           (i)      in the case of the issuance of shares of
                                    Capital Stock for cash the consideration
                                    shall be the amount of cash, provided that
                                    in no case shall any deduction be made
                                    discounts or other expenses incurred by the
                                    corporation for any underwriting of the
                                    issue or otherwise in connection therewith;
                                    and

                           (ii)     in the case of the issuance of shares of
                                    Capital Stock for a consideration in whole
                                    or in part other than cash, the
                                    consideration other than cash shall be
                                    deemed to be the fair market value thereof
                                    as reasonably determined in good faith by
                                    the Board of Directors or a duly authorized
                                    committee thereof (irrespective of the
                                    accounting treatment thereof), and described
                                    in a resolution of the Board of Directors or
                                    such committee.

                  (g)      If after an adjustment a Warrant Holder may, upon
                           exercise of this Warrant in whole or in part, receive
                           shares of two or more classes of Capital Stock of the
                           Corporation, the Corporation shall determine on a
                           fair basis the allocation of the adjusted Exchange
                           Price per Share between the classes of Capital Stock.
                           After such allocation, the Exchange Price per Share
                           of each class of Capital Stock shall thereafter be
                           subject to adjustment on terms comparable to those
                           applicable to Common Stock in this section 11.

                  (h)      In no event shall an adjustment pursuant to this
                           section 11 reduce the Exchange Price per Share below
                           the then par value, if any, of the shares of Common
                           Stock issuable upon exercise of this Warrant.

                  (i)      No adjustment in the Exchange Price Per Share shall
                           be required unless such adjustment would require an
                           increase or decrease of at least one percent (1%) in
                           the Exchange Price Per Share then in effect.

                  (j)      If there shall occur:

                           (i)      any reclassification or change of
                                    outstanding shares of Common Stock issuable
                                    upon exercise of this Warrant (other than a
                                    change in par value or from par value to no
                                    par value, or from no par value to par
                                    value, or as a result of a subdivision or
                                    combination),

                           (ii)     any consolidation or merger of the
                                    Corporation with or into another Person
                                    shall be effected as a result of which
                                    holders of Common Stock issuable upon
                                    exercise of this Warrant shall be entitled
                                    to

                                                       -11-

<PAGE>



                                    receive stock, securities or other property
                                    or assets (including cash) with respect to
                                    or in exchange for such Common Stock, or

                           (iii)    any sale or conveyance of the properties and
                                    assets of the Corporation as, or
                                    substantially as, an entirety to any other
                                    Person, each Warrant Share shall be
                                    convertible into the kind and amount of
                                    shares of stock and other securities or
                                    property or assets (including cash)
                                    receivable upon such reclassification,
                                    change, consolidation, merger, sale or
                                    conveyance by a holder of the number of
                                    shares of Common Stock issuable upon
                                    exercise of this Warrant immediately prior
                                    to such reclassification, change,
                                    consolidation, merger, sale or conveyance.
                                    In any such case, appropriate adjustments
                                    which shall be as nearly equivalent as may
                                    be practicable to the adjustments provided
                                    for in this section 11.

                                    If this section 11(i) applies with respect
                                    to a transaction, sections 11(b), (c) and
                                    (d) hereof shall not apply with respect to
                                    that transaction. The above provisions of
                                    this section 11(i) shall similarly apply to
                                    successive reclassifications,
                                    consolidations, mergers and sales.

                           (k)      Notice to Warrant Holders Prior to Certain 
                                    Actions.

                                    (i)     If:

                                            (A)      The Corporation shall take
                                                     any action that would
                                                     require an adjustment in
                                                     the Exchange Price per
                                                     Share pursuant to section
                                                     11 hereof; or

                                            (B)      any event described in
                                                     section 11(j) hereof shall
                                                     occur; or

                                            (C)      the voluntary or
                                                     involuntary dissolution,
                                                     liquidation or winding-up
                                                     of the Corporation shall
                                                     occur;

                                            the Corporation shall cause notice
                                            of such proposed action or event to
                                            be mailed to each Warrant Holder at
                                            its address appearing on the Warrant
                                            Register of the Corporation, as
                                            promptly as possible but in any
                                            event no later than the later of (x)
                                            the date 15 days prior to the record
                                            date for such proposed action or the
                                            effective date of such event or (y)
                                            the date on which the Corporation
                                            first publicly announces such
                                            proposed action or event.

                                                       -12-

<PAGE>



                                    (ii)    In any event, such notice shall
                                            specify:

                                            (A)      the date on which a record
                                                     is to be taken for the
                                                     purpose of such action, or,
                                                     if a record is not to be
                                                     taken, the date as of which
                                                     the holders of record of
                                                     Common Stock are to be
                                                     determined, or

                                            (B)      the date on which such
                                                     proposed event is expected
                                                     to become effective, and
                                                     the date as of which it is
                                                     expected that holders of
                                                     record of Common Stock
                                                     shall be entitled to
                                                     exchange their Common Stock
                                                     for securities or other
                                                     property deliverable upon
                                                     such event.

                  (l)      Irrespective of any adjustments in the number or kind
                           of shares purchasable upon the exercise of the
                           Warrant, Warrant Certificates theretofore or
                           thereafter issued may continue to express the same
                           number and kind of shares as are stated on the
                           Warrant Certificates initially issuable pursuant to
                           this Warrant Agreement

12.      SEC REGISTRATION; RESTRICTIONS ON TRANSFER; SUBSEQUENT TRANSFEREES AS
         THIRD PARTY BENEFICIARIES.

         (a)       The Warrant Holder (i) represents that it is acquiring the
                   Warrants for its own account for investment and not with a
                   view to any distribution or public offering within the
                   meaning of the Securities Act, (ii) acknowledges that the
                   Warrants and the Warrant Shares issuable upon exercise
                   thereof have not been registered under the Securities Act or
                   any state securities laws and (iii) agrees that it will not
                   sell or otherwise transfer any of its Warrants or Warrant
                   Shares except upon the terms and conditions specified herein,
                   provided that the Warrant Holders may sell the Warrants
                   or the Warrant Shares purchased upon exercise of the Warrants
                   in one or more private transactions not requiring
                   registration under the Securities Act.

          (b)      (i)  Except as otherwise provided in section 12(c) hereof,
                        each Warrant Certificate and each certificate for the
                        Warrant Shares issued to a Warrant Holder shall include
                        a legend in substantially the following form (with such
                        changes therein as may be appropriate to reflect whether
                        such legend refers to Warrants or Warrant Shares),
                        provided that such legend shall not be required if such
                        transfer is being made in connection with a sale which
                        is exempt from registration pursuant to Rule 144 under
                        the Securities Act or if the opinion of counsel referred
                        to in section 12(c) hereof is to the further effect
                        that neither such legend nor the restrictions on
                        transfer in this section 12 is required in order to
                        ensure compliance with the Securities Act:

                                                       -13-

<PAGE>



                  THE [WARRANTS/SHARES] REPRESENTED BY THIS CERTIFICATE HAVE NOT
                  BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY
                  APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
                  TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
                  EXEMPTION THEREFROM UNDER SUCH ACT OR LAWS. SUCH
                  [WARRANTS/SHARES] MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH
                  THE CONDITIONS SPECIFIED IN AND ARE SUBJECT TO OTHER
                  PROVISIONS OF THE WARRANT AGREEMENT DATED AS OF APRIL 3,1996,
                  AS AMENDED BETWEEN THE CORPORATION AND THE WARRANT HOLDER, A
                  COMPLETE AND CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION
                  AT THE PRINCIPAL OFFICE OF THE CORPORATION AND WILL BE
                  FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
                  WITHOUT CHARGE.

                  (ii)     Each certificate for the Warrant Shares issued to a
                           Warrant Holder shall also include a legend in
                           substantially the following form:

                  THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE
                  SUBJECT TO RESTRICTIONS ON TRANSFER FOR THE PURPOSE OF THE
                  CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE
                  INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS
                  AMENDED. SUBJECT TO CERTAIN PROVISIONS OF THE CORPORATION'S
                  SECOND RESTATED CERTIFICATE OF INCORPORATION, NO PERSON MAY
                  BENEFICIALLY OWN SHARES OF EQUITY STOCK IN EXCESS OF 9.8% (OR
                  SUCH GREATER PERCENTAGE AS MAY BE DETERMINED BY THE BOARD OF
                  DIRECTORS OF THE CORPORATION) OF THE OUTSTANDING CAPITAL STOCK
                  OF THE CORPORATION (UNLESS SUCH PERSON IS AN EXISTING HOLDER)
                  AND NO PERSON (OTHER THAN AN EXISTING HOLDER WHO
                  CONSTRUCTIVELY OWNS IN EXCESS OF 9.8% OF THE EQUITY STOCK
                  IMMEDIATELY FOLLOWING THE CONSUMMATION OF THE INITIAL PUBLIC
                  OFFERING) MAY CONSTRUCTIVELY OWN SHARES OF EQUITY STOCK IN
                  EXCESS OF 9.5% OF THE OUTSTANDING CAPITAL STOCK OF THE
                  CORPORATION. ANY PERSON WHO ATTEMPTS TO BENEFICIALLY OWN OR
                  CONSTRUCTIVELY OWN SHARES OF EQUITY STOCK IN EXCESS OF THE
                  ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION. ALL
                  CAPITALIZED TERMS IN THIS LEGEND HAVE THE MEANINGS DEFINED IN
                  THE CORPORATION'S SECOND RESTATED CERTIFICATE OF
                  INCORPORATION, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON
                  TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO
                  REQUESTS. IF THE RESTRICTIONS ON TRANSFER ARE VIOLATED, THE
                  SHARES OF COMMON STOCK REPRESENTED HEREBY WILL BE
                  AUTOMATICALLY CONVERTED

                                                       -14-

<PAGE>



                  INTO SHARES OF EXCESS STOCK WHICH WILL BE HELD IN TRUST BY THE
                  CORPORATION.

         (c)      Each Warrant Holder wishing to effect such a transfer of any
                  Warrant or Warrant Shares shall furnish to the Corporation an
                  agreement by the transferee thereof that it is taking and
                  holding the same subject to the terms and conditions specified
                  herein and a written opinion of such Warrant Holder's counsel,
                  in form reasonably satisfactory to the Corporation to the
                  effect that the proposed transfer may be effected without
                  registration under the Securities Act and any applicable state
                  securities laws.

         (d)      The restrictions set forth in this section 12 shall terminate
                  and cease to be effective with respect to any Warrants or
                  Warrant Shares registered under the Securities Act or upon
                  receipt by the Corporation of an opinion of counsel, in form
                  reasonably satisfactory to the Corporation, to the effect that
                  compliance with such restrictions is not necessary in order to
                  comply with the Securities Act and any applicable state
                  securities laws with respect to the transfer of the Warrants
                  and/or the Warrant Shares. Whenever such restrictions shall so
                  terminate the holder of such Warrants and/or Warrant Shares
                  shall be entitled to receive from the Corporation, without
                  expense (other than transfer taxes, if any), Warrant
                  Certificates or certificates for such Warrant Shares not
                  bearing the legend set forth in section 12(b)(i) hereof which
                  the Corporation will rescind any transfer restrictions
                  relating thereto.

         (e)      It is the intention of the parties hereto that each Warrant
                  Holder who acquires Warrants by transfer be a third party
                  beneficiary, to the extent of Warrants acquired and held by
                  such Warrant Holder, of the provisions of this Warrant
                  Agreement that bestow rights on Warrant Holders.

13.      AMENDMENTS AND WAIVERS. Any provision of this Warrant Agreement may be
         amended, supplemented, waived, discharged or terminated by a written
         instrument signed by the Corporation and the holders of not less than a
         majority of the outstanding Warrants, provided that the Exchange Price
         per Share may not be increased by amendment, the number of Warrant
         Shares issuable upon exercise of the Warrants may not be reduced by
         amendment and this section 13 may not be changed by amendment except
         with the unanimous consent of the holders of all outstanding Warrants.

14.      SPECIFIC PERFORMANCE. The holders of the Warrants shall have the right
         to specific performance by the Corporation of the provisions of this
         Warrant Agreement. The Corporation hereby irrevocably waives, to the
         extent that it may do so under applicable law, any defense based on the
         adequacy of a remedy at law which may be asserted as a bar to the
         remedy of specific performance in any action brought against the
         Corporation for specific performance of this Warrant Agreement by the
         holders of the Warrants.

                                                       -15-

<PAGE>



15.      NOTICES.

         (a)      Any notice or demand permitted or required to be given or made
                  by the holders or the holders of Warrant Shares to or on the
                  Corporation pursuant to this Warrant Agreement shall be
                  sufficiently given or made if delivered personally or by
                  telecopy (if the sender on the same day sends a confirming
                  copy of such notice by a nationally recognized overnight
                  delivery service, postage prepaid), or if sent by certified or
                  registered mail or a nationally recognized overnight delivery
                  service postage prepaid, addressed to the Corporation at the
                  Warrant Office.

         (b)      Any notice permitted or required to be given by the
                  Corporation to the holders or the holders of Warrant Shares
                  shall be sufficiently given or made if delivered personally or
                  by telecopy (if the sender on the same day sends a confirming
                  copy of such notice by a recognized overnight delivery
                  service, postage prepaid), or if sent by certified or
                  registered mail or a nationally recognized overnight delivery
                  service, postage prepaid, addressed to such holder as such
                  holder's name and address shall appear on the Warrant Register
                  or the Common Stock registry of the Corporation, as the case
                  may be.

16.      BINDING EFFECT. This Warrant Agreement shall be binding upon and inure
         to the sole and exclusive benefit of the Corporation and the Warrant
         Holder, and their respective successors and assigns.

17.      CONTINUED VALIDITY. A holder of Warrant Shares shall continue to be
         entitled with respect to such Warrant Shares to all rights and subject
         to all obligations to which it would have been entitled or subject as a
         holder under sections 13 through 20 hereof.

18.      COUNTERPARTS. This Warrant Agreement may be executed in one or more
         separate counterparts and all of said counterparts taken together shall
         be deemed to constitute one and the same instrument.

19.      NEW YORK LAW. THIS WARRANT AGREEMENT AND EACH WARRANT
         CERTIFICATE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
         WITH THE LAWS OF THE STATE OF NEW YORK.

20.      BENEFITS OF THIS AGREEMENT. Nothing in this Warrant Agreement shall be
         construed to give any Person other than the Corporation and the Warrant
         Holder any legal or equitable right. remedy or claim under this Warrant
         Agreement except as expressly set forth herein.



                   [Balance of Page Intentionally Left Blank]

                                                       -16-

<PAGE>



                  IN WITNESS WHEREOF the parties hereto have caused this Warrant
Agreement to be duty executed and delivered by their proper and duly authorized
officers, as of the date and year first above written.


                              FAC REALTY, INC.


                              By: /s/ C. Cammack Morton
                                            Name:    C Cammack Morton
                                            Title:   President and Chief
                                                      Operating Officer



                                            NATIONAL UNION FIRE INSURANCE
                                            COMPANY OF PITTSBURGH


                             By : /s/ David B. Pinkerton
                                            Name:    David B. Pinkerton
                                            Title:   Vice President


                                                       -17-

<PAGE>







                          EXERCISABLE ONLY ON OR BEFORE
                                  APRIL 3, 2003

                         FACTORY STORES OF AMERICA, INC.

                               Warrant Certificate

         This Warrant Certificate is one of the Warrant Certificates referred to
in the Warrant Agreement dated as of November 17,1996 (the "Warrant Agreement")
between FAC Realty. Inc. (formerly Factory Stores of America, Inc.), a Delaware
corporation (the Corporation"), and National Union Fire Insurance Company of
Pittsburgh ("Warrant Holder"). The Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitations, obligations, duties and immunities
thereunder of the Corporation and the holders. Terms defined in the Warrant
Agreement and used herein have the same meanings herein as therein.

         This Warrant Certificate certifies that Warrant Holder, or registered
assigns, is the registered holder of 20,000 Warrants to purchase shares of
Common Stock of the Corporation. Each Warrant entitles the registered holder,
but only subject to the conditions set forth herein and in the Warrant
Agreement, to purchase from the Corporation on or prior to 5:00 PM, New York
City time, on the Expiration Date, one fully paid and nonassessable share of
Common Stock (subject to adjustment as described below) at a price equal to the
Exchange Price per Share.

         The Exchange Price per Share shall be payable in lawful money of the
United States of America. The Warrants represented by this certificate may be
exercised by surrender of this Warrant Certificate, along with an executed copy
of the annexed Form of Election to Purchase and payment of the applicable
Exchange Price per Share at the office of the Corporation at 1095 Old Cedar
Road, McLean, Virginia 22102, or such other address as the Corporation may
specify in writing to the registered holder of the Warrants evidenced hereby.
The Exchange Price per Share and the number of shares of Common Stock
purchasable upon exercise of the Warrants is subject to adjustment prior to the
Expiration Date as set forth in the Warrant Agreement.

         No Warrant may be exercised after 5:00 PM, New York City time, on the
Expiration Date and (except as otherwise provided in the Warrant Agreement) all
rights of the registered holders of the Warrants shall cease after 5:00 PM, New
York City time, on the Expiration Date.


                                                       -18-

<PAGE>



         The Corporation may deem and treat the registered holders of the
Warrants evidenced hereby as the absolute owners thereof (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof and of any distribution to the holders hereof and for all
other purposes, and the Corporation shall not be affected by any notice to the
contrary.

         Warrant Certificates, when surrendered at the Warrant Office by the
registered holder hereof in person or by a legal representative duly authorized
in writing, may be exchanged, in the manner and subject to the limitations
provided in the Warrant Agreement, but without payment of any service charge,
for another Warrant Certificate or Warrant Certificates of like tenor evidencing
in the aggregate a like number of Warrants.

         Upon due presentment for registration of transfer of this Warrant
Certificate at the Warrant Office, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued in exchange for this Warrant Certificate to the
transferee(s) and, if less than all the Warrants evidenced hereby are to be
transferred, to the registered holder hereof, subject to the limitations
provided in the Warrant Agreement, without charge except for any tax or other
governmental charge imposed in connection therewith.

         No holder of this Warrant Certificate shall be deemed to be the holder
of Common Stock or any other securities of the Corporation that may at any time
be issuable on the exercise hereof for any purpose, nor shall anything contained
in the Warrant Agreement or herein be construed to confer upon the holder of
this Warrant Certificate as such any of the rights of a stockholder of the
Corporation or any right to vote for the election of directors or upon any
matter submitted to stockholder at any meeting hereof, or to give or withhold
consent to any corporate action (whether upon any reorganization, issuance of
stock, reclassification or conversion of stock change of par value, or exchange
of stock to no par value, consolidation, merger. conveyance or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise, until this Warrant Certificate shall have been exercised and the
Common Stock issuable upon the exercise hereof shall have become issuable as
provided in the Warrant Agreement.



                   [Balance of Page Intentionally Left Blank)


                                                       -19-

<PAGE>













         IN WITNESS WHEREOF the Corporation has caused this Warrant Certificate
to be signed by its duly authorized officers and has caused its corporate seal
to be affixed hereunto.

                                             FAC REALTY, INC.

                                             By: /s/ C. Cammack Morton
                                             Name:    C. Cammack Morton
                                             Title:   President and Chief
                                                Operating Officer

(CORPORATE SEAL)
ATTEST


Assistant Secretary


                                                       -20-

<PAGE>


                      ANNEX TO FORM OF WARRANT CERTIFICATE


                          FORM OF ELECTION TO PURCHASE

                    (To be executed upon exercise of Warrant)

         The undersigned hereby irrevocably elects to exercise, in accordance
with section 6(b) of the Warrant Agreement, Warrants, representing the right to
purchase
                   shares of Common Stock, and herewith tenders payment for such
Shares of Common Stock to the order of the Corporation in the amount of $ as
payment of the exercise price in accordance with the terms hereof.

         The undersigned requests that a certificate for such shares of Common
Stock be registered in the name of whose address is and that such certificate be
delivered to whose address is . If said number of shares of Common Stock is less
than all of the shares of Common Stock purchasable hereunder under the method of
exercise selected, the undersigned hereby requests that a new Warrant
Certificate representing the remaining balance of the shares of Common Stock be
registered in the name of whose address is
                                                         and that such Warrant
Certificate be delivered to                                whose address is
                                                       .


Signature:



(Signature must conform in all respects to name of holder as specified on the
face of the Warrant Certificate.)

Date:



                                                       -21-

<PAGE>