EMPLOYMENT AGREEMENT


                                     BETWEEN


                                FAC REALTY, INC.


                                       AND


                                C. CAMMACK MORTON


<PAGE>


                              EMPLOYMENT AGREEMENT


     THIS EMPLOYMENT  AGREEMENT is entered into as of the 1st day of March, 1997
between FAC REALTY, INC., a Delaware corporation (the "Company"), and C. CAMMACK
MORTON (the  "Executive")  for  employment  commencing on the Effective Date (as
hereinafter defined).

                              W I T N E S S E T H:

     WHEREAS,  the  Executive  has been employed by the Company as President and
Chief  Operating   Officer  under  that  certain  Second  Amended  and  Restated
Employment  Agreement between Factory Stores of America,  Inc., now known as FAC
Realty, Inc., and dated December 15, 1995 (the "Original Employment Agreement");
and

     WHEREAS, the Company desires to employ the Executive as its Chief Executive
Officer and to terminate the Original  Employment  Agreement,  and the Executive
desires to be so employed on the terms and subject to the  conditions  set forth
herein.

     NOW,  THEREFORE,  in consideration of the mutual promises herein contained,
the parties agree as follows:

     1. Employment.

     (a) The Company hereby employs the Executive as President and Chief
Executive Officer and the Executive hereby accepts such employment, on the terms
and subject to the conditions hereinafter set forth. The Original Employment
Agreement is hereby terminated.

     (b) During the term of his employment  under this Employment  Agreement and
any  extension  hereof  (all  references  herein to the term of this  Employment
Agreement shall include any extension  hereof),  the Executive shall be and have
the title of President and Chief  Executive  Officer and shall devote his entire
business  time  and  all  reasonable  efforts  to  his  employment  and  perform
diligently  such duties as are  customarily  performed by  presidents  and chief
executive  officers of companies  similar in size to the Company,  together with
such other duties as may be reasonably  requested from time to time by the Board
of Directors of the Company (the "Board"), which duties shall be consistent with
his title and  position  as set forth  above and as  provided  in  Paragraph  2;
provided,  however,  that business  activities by the Executive  with respect to
passive  investments,  so long  as  such  activities  do  not,  alone  or in the
aggregate,  materially interfere with the Executive's  performance of his duties
as described in this Paragraph  l(b), will not be deemed  inconsistent  with the
requirements of this Paragraph l(b).

     2. Term and Positions.

     (a) Subject to the  provisions  for  extension or  termination  hereinafter
stated,  the term of this  Employment  Agreement shall begin as of March 1, 1997
(the "Effective Date")


                                       -2-

<PAGE>

and shall continue through February 29, 2000 (the "Expiration  Date"). As of the
March 1, 1998 and each successive  anniversary thereof,  such term automatically
shall be extended  for one (1)  additional  year,  unless:  (i) this  Employment
Agreement is terminated as provided in Paragraph 5 or (ii) either the Company or
the Executive  shall give written  notice to the other at least thirty (30) days
before the first  anniversary  of the Effective  Date or any  subsequent  annual
anniversary thereof, that this Employment Agreement shall not be so extended but
shall  terminate  upon the  expiration of the  then-existing  term (for example,
unless such written notice of  non-extension is given on or prior to January 28,
1998,  the term of this  Employment  Agreement  automatically  will be extended,
effective March 1, 1998,  until February 28, 2001). In the event of a "change of
control" (as hereinafter  defined) the term of this  Employment  Agreement shall
automatically  be  extended  for a term of two (2) years from the then  existing
Termination Date.

     (b) The  Executive  shall  be  entitled  to serve as  President  and  Chief
Executive  Officer of the  Company.  For  service  as a  director,  officer  and
employee of the Company,  the Executive shall be entitled to the full protection
of the  applicable  indemnification  provisions of the Restated  Certificate  of
Incorporation and Bylaws of the Company, as the same may be amended from time to
time, which  indemnifications  shall remain effective after  termination of this
Employment  Agreement with respect to Executive's  actions and inactions  during
the term hereof. Without limiting the generality of any of the foregoing, except
as hereafter expressly agreed in writing by the Executive, during and throughout
the term of his employment under this Employment Agreement: (i) all employees of
the Company  shall report  directly or  indirectly  to the  Executive;  and (ii)
unless the Board of Directors shall otherwise  direct,  the Executive shall have
the authority to make operating decisions regarding  day-to-day operation of the
business.

     (c) If:

          (i)  the  Company   materially  changes  the  Executive's  duties  and
     responsibilities  as set  forth in  Paragraphs  l(b) and 2(b)  without  his
     consent;

          (ii) the  Executive's  place of employment or the principal  executive
     offices  of the  Company  are  located  more than fifty (50) miles from the
     geographical center of Cary, North Carolina;

          (iii)  there  occurs a  material  breach by the  Company of any of its
     obligations  under this  Employment  Agreement,  which  breach has not been
     cured in all  material  respects  within ten (10) days after the  Executive
     gives notice thereof to the Company;

          (iv) there  occurs a "change in control" (as  hereinafter  defined) of
     the Company during the term of this Employment Agreement; or


                                       -3-

<PAGE>


          (v) after the Effective Date, the Executive is not at all times during
     his  employment  hereunder a member of the Board of  Directors,  or, if the
     Board of Directors constitutes an Executive Committee, the Executive is not
     at all times  during his  employment  hereunder a member of such  Executive
     Committee;

then in any such  event the  Executive  shall  have the right to  terminate  his
employment  with the Company,  but such  termination  shall not be  considered a
voluntary  resignation or termination of such  employment or of this  Employment
Agreement  by the  Executive  but rather a  discharge  of the  Executive  by the
Company  "without  cause" (as defined in  Paragraph 5 (a)).  The  Executive  may
exercise such right of termination at any time within three (3) months following
the  occurrence  of the  applicable  event  described  in (i) and  (iii) of this
Paragraph  2(c),  and within  six (6) months  following  the  occurrence  of the
applicable event described in (ii), (iv) and (v) of this Paragraph 2(c).

     (d) The  Executive  shall be deemed not to have  consented  to any  written
proposal calling for a material change in his duties and responsibilities unless
he shall give written notice of his consent  thereto to the Board of the Company
within  fifteen  (15)  days  after  receipt  of such  written  proposal.  If the
Executive  shall  not have  given  such  consent,  the  Company  shall  have the
opportunity to withdraw such proposed  material  change by written notice to the
Executive  given  within  ten (10) days after the end of said  fifteen  (15) day
period.

     (e) The term "change in control"  means the first to occur of the following
events:

          (i) any  person  or  group  of  commonly  controlled  persons  owns or
     controls, directly or indirectly,  fifty percent (50%) or more (directly or
     indirectly,  including convertible shares or convertible partnership units)
     of the  voting  control  or  value  of the  capital  stock  of the  Company
     following the Effective Date;

          (ii) any person or group of commonly  controlled  persons  owning less
     than five percent (5%) of the voting  control or value of the capital stock
     of the  Company  within  30  days  following  the  Effective  Date  owns or
     controls,  directly or indirectly, more than twenty percent (20%) (directly
     or indirectly,  including  convertible  shares or  convertible  partnership
     units) of the voting  control or value of the capital stock of the Company;
     or

          (iii)  following the Effective  Date, the  stockholders of the Company
     approve an agreement to merge or  consolidate  with another  corporation or
     other entity resulting  (whether  separately or in connection with a series
     of  transactions)  in a change in ownership of twenty percent (20%) or more
     (directly  or  indirectly,  including  convertible  shares  or  convertible
     partnership  units) of the voting  control or value of the capital stock of
     the  Company,  or an  agreement  to sell  or  otherwise  dispose  of all or
     substantially all of the Company's assets (including without limitation,  a
     plan of liquidation or dissolution),  or otherwise approve of a fundamental
     alteration in the nature of the Company's business; provided,

                                       -4-

<PAGE>


     however,  a pledge,  hypothecation  or other  similar  disposition  for the
     purpose  of  providing  collateral  security  made at the time the  Company
     enters  into a bona fide  financing  transaction  with a party which at the
     time of such  transaction  is not an  affiliate  of the  Company  would not
     constitute a change in control.

Notwithstanding  the foregoing  provisions of this Paragraph 2, the ownership or
acquisition of capital stock by the Executive, J. Dixon Fleming, Jr., Patrick M.
Miniutti,  Christopher G. Gavrelis, Connell L. Radcliff, and/or their respective
affiliates,  shall not be deemed to  result  in a  "change  in  control"  of the
Company.

     3. Compensation.

     During the term of his  employment  under  this  Employment  Agreement  the
Company  shall  pay or  provide,  as the  case  may  be,  to the  Executive  the
compensation  and other  benefits and rights set forth in this  Paragraph 3. All
restricted  stock given as  compensation  shall be subject to the Company's 1996
Restricted Stock Plan.

          (a) The Company  shall pay to the  Executive a base salary  payable in
     accordance with the Company's usual pay practices (and in any event no less
     frequently  than  monthly)  of (i) cash  payments of Three  Hundred  Thirty
     Thousand and No/100 Dollars  ($330,000.00)  per annum; (ii) Common Stock of
     the Company  equivalent to $200,000 based on the market price of the Common
     Stock on March 1, 1997 and each subsequent annual anniversary, rounded down
     to the nearest  1,000 shares (for example,  $200,000  divided by $6.625 per
     share  would  result  in  30,000   shares   issued),   which  shares  shall
     automatically vest on the subsequent annual anniversary (for example, March
     1, 1998 for shares issued March 1, 1997) unless the  Executive  voluntarily
     terminates his employment  prior to such anniversary date or his employment
     is terminated for "cause" (see  Paragraph 5 (a) (iii));  (iii) Common Stock
     of the  Company  equivalent  to $25,000  based on the  market  price of the
     Common  Stock on March 1,  1997  and  each  subsequent  annual  anniversary
     rounded up to the  nearest  1,000  shares  plus 50% (for  example,  $25,000
     divided by $6.625 per share would result in 4,000  shares  issued plus 50%,
     or a total of 6,000 shares),  which shares shall  automatically vest on the
     third  anniversary of the date of issuance (for example,  March 1, 2000 for
     shares  issued March 1, 1997) unless the Executive  voluntarily  terminates
     his  employment  prior  to  such  anniversary  date  or his  employment  is
     terminated for "cause" (see Paragraph 5 (a) (iii)); and (iv) such increases
     (but not  decreases)  from time to time (based upon the  performance of the
     Company and the  Executive)  as  determined  by the Board or the  Company's
     Executive Compensation Committee payable in the form of Common Stock of the
     Company similar to (iii) above.

          (b) The  Company  may pay to the  Executive  bonus  compensation  on a
     calendar  year basis  pursuant to the terms of the  incentive  compensation
     plan  established  by the Board  from time to time,  not later than March 1
     following each calendar year. Such bonus compensation may be payable in the
     form of cash or Common  Stock of the  Company.  In the event  such bonus is
     paid in the form of Common Stock, the determination of shares issued may be
     based on the cash  equivalent  divided  by the  market  price of the Common
     Stock on or about the date of determination of the bonus


                                       -5-

<PAGE>


     compensation  by the Board.  Such shares will be increased by 50% and shall
     automatically  vest on the third  anniversary  of the date of issuance (for
     example,  March 1,  2001  for  shares  issued  March 1,  1998)  unless  the
     Executive  voluntarily  terminates his employment prior to such anniversary
     date or his  employment  is  terminated  for "cause"  (see  Paragraph 5 (a)
     (iii)).

          (c)  The  Company  shall  provide  to  the  Executive   such  medical,
     hospitalization  and dental insurance for himself,  his spouse and eligible
     family  members,  as may be available to other  officers of the Company and
     term life insurance in the amount of not less than $1,000,000.

          (d) The  Executive  shall  participate  in all  retirement  and  other
     benefit  plans of the  Company  generally  available  from  time to time to
     officers  of the Company and for which the  Executive  qualifies  under the
     terms thereof (and nothing in this  Employment  Agreement shall or shall be
     deemed to in any way affect the Executive's rights and benefits  thereunder
     except as expressly provided herein).

          (e) The  Executive  shall be entitled to such  periods of vacation and
     sick leave allowance each year as are determined by the Company's Executive
     Compensation  Committee for officers  generally;  provided  that  Executive
     shall be  entitled  to not less than four weeks  (twenty  days) of vacation
     each year.

          (f) The Executive  shall be entitled to  participate  in any equity or
     other employee benefit plan that is generally available to senior executive
     officers,  as distinguished from general  management,  of the Company.  The
     Executive's  participation  in and benefits under any such plan shall be on
     the terms and subject to the conditions specified in the governing document
     of the particular plan.

          (g) The Company  shall  reimburse the Executive or provide him with an
     expense allowance during the term of this Employment  Agreement for travel,
     entertainment and other expenses reasonably and necessarily incurred by the
     Executive in connection  with the Company's  business.  The Executive shall
     furnish  such  documentation  with  respect  to  reimbursement  to be  paid
     hereunder as the Company shall reasonably request.

          (h) The Company  shall (i) pay to the  Executive an annual  automobile
     allowance  of  $8,000  payable  on a pro rata  monthly  basis;  (ii) pay or
     reimburse the Executive for country club  initiation  fees of up to $20,000
     plus periodic  dues;  and (iii) pay or reimburse the Executive up to $2,500
     annually for expenses of financial, estate or tax planning.

     4. Payment in the Event of Death or Permanent Disability.

     (a) In the event of the  Executive's  death or "permanent  disability"  (as
hereinafter  defined)  during the term of his employment  under this  Employment
Agreement,   the  Company   shall  pay  to  the   Executive   (or  his  personal
representatives, 


                                      -6-
<PAGE>


heirs,  successors and assigns in the event of his death) an amount equal to two
(2) times the Executive's then effective annual base salary, as determined under
Paragraph 3(a), plus a pro rata portion of the bonus  applicable to the calendar
year in which  such  death or  permanent  disability  occurs,  as such  bonus is
determined under Paragraph 3(b).

     (b) The pro rata portion of the bonus  described in Paragraph 4(a) shall be
paid when and as provided in Paragraph  3(b). The remainder of the benefit to be
paid pursuant to Paragraph  4(a) shall be paid within ninety (90) days after the
date of death or permanent disability, as the case may be.

     (c) Except as otherwise  provided in Paragraphs  2(b), 3(d), 4(a) and 4(b),
in the event of the Executive's death or permanent  disability,  the Executive's
employment  hereunder  shall terminate and the Executive shall be entitled to no
further compensation or other benefits under this Employment  Agreement,  except
as to that portion of any unpaid salary and other benefits accrued and earned by
him  hereunder  up to  and  including  the  date  of  such  death  or  permanent
disability, as the case may be.

     (d) For purposes of this Employment Agreement,  the Executive's  "permanent
disability" shall be deemed to have occurred after one hundred twenty (120) days
in the  aggregate  during any  consecutive  twelve (12) month  period,  or after
ninety (90)  consecutive  days,  during which one hundred twenty (120) or ninety
(90)  days,  as the case may be, the  Executive,  by reason of his  physical  or
mental  disability  or illness,  shall have been unable to discharge  his duties
under this Employment Agreement.  The date of permanent disability shall be such
one hundred  twentieth  (120th) or ninetieth  (90th) day, as the case may be. In
the event either the Company or the  Executive,  after  receipt of notice of the
Executive's  permanent  disability from the other,  dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Raleigh, North Carolina,  area and, unless such physician shall issue his
written statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his  employment  and devoting his full time and
energy to discharging  his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.

     5. Termination.

     (a) The Employment of the Executive  under this Employment  Agreement,  and
the term hereof, may be terminated by the Company:

          (i) on the death or  permanent  disability  (as defined  above) of the
     Executive;

          (ii) for "cause" at any time by action of the Board; or

          (iii) "without cause" at any time by action of the Board.


                                      -7-
<PAGE>


     For purposes hereof, the term "cause" shall mean:


                                       -8-
<PAGE>


               (A) The Executive's fraud, commission of a felony,  commission of
          an act or series of repeated acts of dishonesty which fraud, felony or
          dishonesty  is  materially  inimical  to  the  best  interests  of the
          Company,   or  which  results  in  material  injury  to  the  business
          reputation  of the Company,  or the  Executive's  willful and repeated
          failure to perform his duties under this Employment  Agreement,  which
          failure has not been cured within  fifteen (15) days after the Company
          gives notice thereof to the Executive; or

               (B) The Executive's  material breach of any material provision of
          this  Employment  Agreement,  which  breach  has not been cured in all
          substantial  respects  within  ten (10) days after the  Company  gives
          notice thereof to the Executive.

     For purposes  hereof,  the term "without cause" shall mean any reason other
     than those set forth in subparagraphs  (a)(i) and (a)(ii) of this Paragraph
     5.

The exercise by the Company of its rights of termination  under this Paragraph 5
shall be the Company's  sole remedy in the event of the  occurrence of the event
as a result of which such right to terminate  arises.  Upon any  termination  of
this Employment  Agreement,  the Executive shall be deemed to have resigned from
all offices and directorships held by the Executive in the Company.

     (b) In the event of a termination  claimed by the Company to be for "cause"
pursuant to Paragraph  5(a)(ii),  the Executive shall have the right to have the
justification for said termination  determined by arbitration in Raleigh,  North
Carolina.  In order to exercise  such right,  the  Executive  shall serve on the
Company  within  thirty  (30)  days  after  termination  a written  request  for
arbitration.  The Company  immediately shall request the appointment of a single
arbitrator by the American  Arbitration  Association and thereafter the question
of  "cause"  shall be  determined  under the rules of the  American  Arbitration
Association,  and the decision of the  arbitrator  shall be final and binding on
both parties.  The parties shall use all  reasonable  efforts to facilitate  and
expedite the  arbitration and shall act to cause the arbitration to be completed
as promptly as possible.  During the pendency of the arbitration,  the Executive
shall continue to receive all  compensation and benefits to which he is entitled
hereunder,  and if at any time  during  the  pendency  of such  arbitration  the
Company fails to pay and provide all  compensation and benefits to the Executive
in a timely  manner the  Company  shall be deemed to have  automatically  waived
whatever rights it then may have had to terminate the Executive's employment for
cause. Expenses of the arbitration shall be borne equally by the parties.

     (c) In the event of termination  pursuant to subparagraph (a)(i) or (a)(ii)
of this Paragraph 5, except as otherwise provided in Paragraphs 2(b), 3(d), 4(a)
and  4(b),  as  applicable,  the  Executive  shall  be  entitled  to no  further
compensation  or other benefits under this  Employment  Agreement,  except as to
that portion of any unpaid salary and other  benefits  accrued and earned by him
hereunder up to and including the effective date of such termination.

     (d) In the event of termination pursuant to Paragraph 2(c), or subparagraph
(a)(iii) of this paragraph 5, the Executive shall be entitled to


                                      -9-
<PAGE>


          (i) severance pay payable within five (5) days of such  termination in
     a lump sum equal to the sum of (A) the  greater of (x) the total  amount of
     unpaid  base  salary  for the  then-unexpired  portion  of the term of this
     Employment  Agreement,  including  any extended term as provided by Section
     2(a)  hereof at the  then-effective  annual rate of salary,  as  determined
     under  Paragraph  3(a) and (y) the amount of one year's  base salary at the
     then-effective  annual rate of salary, and (B) the product of the number of
     years  (including  fractions)  representing  the  unexpired  term  of  this
     Employment  Agreement  (but not less than one) times an amount equal to the
     average of the annual bonuses payable to the Executive under Paragraph 3(b)
     for the three (3) full calendar years  immediately  prior to termination of
     this  Employment  Agreement  in which a bonus was  payable  or such  lesser
     number of full  calendar  years  during  which the  Executive  was employed
     hereunder in which a bonus was payable,

          (ii)  during a  period  equal  to the  greater  of one (1) year or the
     unexpired term of this  Employment  Agreement,  all other benefits to which
     the Executive  would have been entitled  during the term of this Employment
     Agreement had the Executive's employment not been terminated,

          (iii)  during a period  equal  to the  greater  of one (1) year or the
     unexpired  term of  this  Employment  Agreement,  the  continuing  use of a
     secretary and office space to be provided by the Company, and

          (iv) other  benefits  accrued  and earned by him  hereunder  up to and
     including the effective date of such termination.

     (e) In the event of the termination of his employment pursuant to Paragraph
2(c) or Paragraph 5(a)(iii),  the Executive shall have the option to be released
from  his  obligations  under  Paragraph  6(a)(i)  for the one (1)  year  period
following the termination of his  employment,  by releasing the Company from its
obligations  under Paragraph 5(d) hereof (other than those provided in Paragraph
5(d)(iv)).  Such option may be  exercised  by the  Executive  giving the Company
notice thereof within five (5) days of such termination.

     (f) In no event shall the  Executive  have or be deemed to have any duty to
seek  employment  or otherwise  mitigate  damages with respect to any amounts or
benefits due to him upon termination of this Employment Agreement as provided in
this  Paragraph 5, nor shall any such amount or benefits be reduced by reason of
any other  compensation  or  benefits  which the  Executive  may earn  following
termination of this Employment Agreement.

     6. Covenants and Confidential Information.

     (a) The Executive  acknowledges  the Company's  reliance and expectation of
the  Executive's   continued   commitment  to  performance  of  his  duties  and
responsibilities  during  the time when he is  employed  under  this  Employment
Agreement.  In light of such reliance and expectation on the part of the Company
(but subject to Paragraph 5(d), 5(e) and 5(f) above),


                                      -10-
<PAGE>


during the time when he is employed  under this  Employment  Agreement and for a
period of one (1) year after the 


                                      -11-
<PAGE>


termination  of such  employment for any reason other than the expiration of the
term hereof in accordance with Paragraph 2(a)(ii) hereof (and, as to clause (ii)
of this  subparagraph  (a),  at any  time  during  and  after  the  term of this
Employment  Agreement),  the Executive  shall not,  directly or  indirectly,  do
either of the following:

          (i) Own, manage, control or participate in the ownership,  management,
     or control  of, or be  employed or engaged by or  otherwise  affiliated  or
     associated as a consultant,  independent  contractor or otherwise with, any
     other corporation, partnership,  proprietorship, firm, association or other
     business  entity  engaged in the business  of, or  otherwise  engage in the
     business of,  acquiring,  owning,  developing  or managing  factory  outlet
     shopping centers;  provided,  however,  that the ownership of not more than
     one percent (1%) of any class of publicly traded  securities of any entity;
     or

          (ii) Disclose, divulge, discuss, copy or otherwise use or suffer to be
     used in any manner,  in competition  with, or contrary to the interests of,
     the  Company,  any  confidential  information  relating  to  the  Company's
     operations,  properties  or otherwise to its  particular  business or other
     trade secrets of the Company,  it being  acknowledged by the Executive that
     all such  information  regarding  the  business of the Company  compiled or
     obtained by, or furnished to, the Executive  while the Executive shall have
     been employed by or associated with the Company is confidential information
     and the Company's exclusive property; provided, however, that the foregoing
     restrictions  shall not apply to the extent  that such  information  (A) is
     obtainable  in the public  domain or known in the industry  generally,  (B)
     becomes obtainable in the public domain or known in the industry generally,
     except by reason of the breach by the  Executive of the terms  hereof,  (C)
     was not acquired by the  Executive in  connection  with his  employment  or
     affiliation  with the Company,  (D) was not acquired by the Executive  from
     the Company or its  representatives,  or (E) is required to be disclosed by
     rule of law or by order of a court or governmental body or agency.

     (b) The  Executive  agrees and  understands  that the remedy at law for any
breach by him of this Paragraph 6 may be inadequate and that the damages flowing
such breach are not readily  susceptible  to being  measured in monetary  terms.
Accordingly,  it is  acknowledged  that,  upon adequate proof of the Executive's
violation of any legally enforceable  provision of this Paragraph 6, the Company
may be entitled to immediate  injunctive relief and may obtain a temporary order
restraining any threatened or further breach.  Nothing in this Paragraph 6 shall
be deemed to limit the Company's  remedies at law or in equity for any breach by
the Executive of any of the  provisions of this Paragraph 6 which may be pursued
or availed of by the Company.

     (c) The  Executive has  carefully  considered  the nature and extent of the
restrictions  upon him and the rights and  remedies  conferred  upon the Company
under this  Paragraph  6, and hereby  acknowledges  and agrees that the same are
reasonable in time and territory,  are designed to eliminate  competition  which
otherwise  would be unfair to the Company,  do not stifle the inherent skill and
experience of the Executive,  would not operate as a bar to the Executive's sole
means of support,  are fully required to protect the legitimate interests of the
Company  and do not confer a benefit  upon the Company  disproportionate  to the
detriment to the Executive.


                                      -12-
<PAGE>


     7. Stock  Options.  The  Executive  shall  receive  stock options under the
Company's 1993 Employee Stock  Incentive Plan as amended as more fully described
in that certain  Nonqualified  Stock Option Agreement and that certain Incentive
Stock Option Agreement dated February 14, 1996 the terms and conditions of which
are incorporated herein by reference.

     8. Restricted  Stock. The Executive shall receive a grant of 150,000 shares
(the  "Restricted  Shares") of restricted  common stock of the Company  ("Common
Stock")  granted  under the  Company's  1996  Restricted  Stock  Plan.  Prior to
vesting,  the Restricted  Shares will be registered  under the Securities Act on
Form S-8,  will be  listed on the NYSE and  following  vesting  thereof  will be
freely tradable subject to applicable  provisions of Rule 144 promulgated  under
the  Securities  Act. With respect to said grant,  the Company and the Executive
shall enter into a Restricted  Stock Agreement in a form mutually agreed upon by
the Company and the Executive  providing  that (i) the  Restricted  Shares shall
vest in ten (10) equal  installments  of ten percent (10%) per year (provided as
to each installment that the Executive continues to be employed by the Company),
commencing  on the  Effective  Date and  thereafter  on the first  through ninth
anniversaries of the Effective Date provided (ii) all unvested Restricted Shares
shall  immediately vest upon the Executive's  death or permanent  disability (as
defined in Paragraph 4(d)) during his employment by the Company;  or termination
of the  Executive's  employment  by the Company  pursuant to  Paragraph  2(c) or
Paragraph  5(a)(iii) or  termination  of the  Executive's  employment due to the
Company's  election  not to extend this  Employment  Agreement  as  permitted in
Paragraph 2(a); or pursuant to Paragraph  5(a)(iii) if such  termination  occurs
within  three (3)  months  prior  to,  at the time of,  or  within  one (1) year
following a "change of control"  (as defined in Section 2(e) hereof) or provided
that such change is effected,  the execution of a definitive  agreement therefor
(notwithstanding  the requirement of continued  employment in  subparagraph  (i)
above, upon such termination of employment).  The Executive shall be entitled to
dividends  on only those  Restricted  Shares  which have vested as of the record
date of any dividend payment.

     9. Tax Adjustment Payments. If all or any portion of the amounts payable to
the Executive under this Employment  Agreement (together with all other payments
of cash or property, whether pursuant to this Employment Agreement or otherwise,
including,  without limitation,  the issuance of common stock of the Company, or
the granting,  exercise or termination of options therefor)  constitutes "excess
parachute  payments"  within the  meaning  of Section  280G of the Code that are
subject to the excise tax  imposed by Section  4999 of the Code (or any  similar
tax or  assessment),  the amounts  payable  hereunder shall be increased (in the
same manner, to the extent applicable,  without duplication, as provided in (i),
(ii) and (iii) below) to the extent necessary to place the Executive in the same
after-tax  position  as he would  have been in had no such tax  assessment  been
imposed  on any  such  payment  paid or  payable  to the  Executive  under  this
Employment  Agreement  or any other  payment that the  Executive  may receive in
connection  therewith.  The  determination  of the  amount  of any  such  tax or
assessment and the incremental  payment required hereby in connection  therewith
shall be made by the  accounting  firm employed by the  Executive  within thirty
(30) calendar days after such payment and said incremental payment shall be made
within five (5) calendar days after such  determination has been made. If, after
the date upon which the payment  required by this  Paragraph 8 has been made, it
is determined (pursuant to final regulations or published rulings of


                                      -13-
<PAGE>


the  Internal  Revenue   Service,   final  judgment  of  a  court  of  competent
jurisdiction,  Internal Revenue Service audit assessment, or otherwise) that the
amount of excise or other similar taxes or assessments  payable by the Executive
is greater than the amount  initially so determined,  then the Company shall pay
the Executive an amount equal to the sum of: (i) such additional excise or other
taxes,  plus  (ii)  any  interest,  fines  and  penalties  resulting  from  such
underpayment,  plus (iii) an amount necessary to reimburse the Executive for any
income,  excise or other tax assessment payable by the Executive with respect to
the amounts specified in (i) and (ii) above, and the  reimbursement  provided by
this clause (iii),  in the manner  described  above in this Paragraph 8. Payment
thereof  shall be made within five (5)  calendar  days after the date upon which
such subsequent determination is made.

     10. Representations and Warranties of the Company.

     (a) The Company is a corporation  duly organized,  validly  existing and in
good  standing  under the laws of the State of  Delaware  and has all  requisite
corporate power and authority to enter into, execute and deliver this Employment
Agreement,  fulfill its  obligations  hereunder and consummate the  transactions
contemplated hereby.

     (b) The execution and delivery of,  performance of obligations  under,  and
consummation of the transactions contemplated by, this Employment Agreement have
been duly  authorized  and approved by all requisite  corporate  action by or in
respect of the Company,  and this Employment  Agreement  constitutes the legally
valid and binding  obligation  of the Company,  enforceable  by the Executive in
accordance with its terms.

     (c) No provision of the Company's  governing  documents or any agreement to
which it is a party or by which it is bound or of any material law or regulation
of the kind usually  applicable and binding upon the Company prohibits or limits
its  ability to enter  into,  execute and  deliver  this  Employment  Agreement,
fulfill its respective  obligations  hereunder and  consummate the  transactions
contemplated hereby.

     11. Miscellaneous.

     (a) The  Executive  represents  and warrants  that he is not a party to any
agreement,  contract or understanding,  whether  employment or otherwise,  which
would  restrict or prohibit him from  undertaking  or  performing  employment in
accordance with the terms and conditions of this Employment Agreement.

     (b) The  provisions of this  Employment  Agreement are severable and if any
one  or  more   provisions   may  be  determined  to  be  illegal  or  otherwise
unenforceable,  in whole or in part, the remaining  provisions and any partially
unenforceable provision to the extent enforceable  nevertheless shall be binding
and enforceable.

     (c) The  rights  and  obligations  of the  Company  under  this  Employment
Agreement  shall  inure to the  benefit of, and shall be binding on, the Company
and its successors and assigns,  and the rights and obligations of the Executive
under this  Employment  Agreement  shall  inure to the  benefit of, and shall be
binding upon, the Executive  (other than  obligations to perform services and to
refrain from  competition  and disclosure of confidential  information)  and


                                      -14-
<PAGE>


his heirs, personal representatives and assigns.

     (d) Any  controversy or claim arising out of or relating to this Employment
Agreement,  or the breach thereof, shall be settled by arbitration in accordance
with the Rules of the American  Arbitration  Association  then pertaining in the
City of Raleigh,  North  Carolina,  and judgment upon the award  rendered by the
arbitrator  or  arbitrators  may be  entered  in any court  having  jurisdiction
thereof.  The arbitrator or arbitrators shall be deemed to possess the powers to
issue  mandatory   orders  and  restraining   orders  in  connection  with  such
arbitration;  provided,  however,  that nothing in this Paragraph 11(d) shall be
construed  so as to deny the  Company  the right  and  power to seek and  obtain
injunctive  relief in a court of equity for any breach or  threatened  breach by
the Executive of any of his covenants contained in Paragraph 6 hereof.

     (e) Any  notice  to be  given  under  this  Employment  Agreement  shall be
personally  delivered  in  writing  or shall  have been  deemed  duly given when
received  after  it is  posted  in the  United  States  mail,  postage  prepaid,
registered or certified return receipt requested,  and if mailed to the Company,
shall be addressed to its principal place of business, attention:  Chairman, and
if mailed to the  Executive,  shall be addressed to him at his home address last
known on the records of the  Company,  or at such other  address or addresses as
either the Company or the Executive  may  hereafter  designate in writing to the
other. All notices provided for hereunder to the parties shall be accompanied by
simultaneous  copy of such notice sent to the  attorneys  for such  parties,  as
follows:

            If to the Executive:

                     Bernard Flateman, Esq.
                     Sills Cummis Zuckerman Radin Tischman Epstein & Gross, P.A.
                     One Riverfront Plaza
                     Newark, New Jersey 07102

            If to the Company:

                     FAC Realty, Inc.
                     11000 Regency Parkway,
                     Third Floor East Tower
                     Cary, North Carolina 27511
                     Attention: General Counsel

Notices  sent by Federal  Express or similar  overnight  delivery  service or by
facsimile  transmissions  shall also  constitute due notice under this paragraph
11(e), effective upon receipt thereof.

     (f) The failure of either party to enforce any  provision or  provisions of
this  Employment  Agreement shall not in any way be construed as a waiver of any
such provision or provisions as to any future  violations  thereof,  nor prevent
that party  thereafter  from  enforcing  each and every other  provision of this
Employment  Agreement.  The rights granted the parties herein are cumulative and
the waiver of any single  remedy  shall not  constitute a waiver of such party's
right  to  assert  all  other  legal   remedies   available   to  it  under  the
circumstances.


                                      -15-
<PAGE>


     (g)  This  Employment   Agreement   supersedes  all  prior  agreements  and
understandings  between the parties made prior to the date hereof and may not be
modified or terminated orally. No modification,  termination or attempted waiver
shall be valid  unless in writing and signed by the party  against whom the same
is sought to be enforced.

     (h) This Employment  Agreement shall be governed by and construed according
to the laws of the State of North Carolina.

     (i) Captions and paragraph headings used herein are for convenience and are
not a part of this Employment Agreement and shall not be used in construing it.

     (j) Where  necessary or  appropriate  to the mean hereof,  the singular and
plural shall be deemed to include each other,  and the  masculine,  feminine and
neuter shall be deemed to include each other.

     (k) This  Employment  Agreement  may be executed in multiple  counterparts,
each of  which  will be  deemed  an  original,  but all of which  together  will
constitute  one  and the  same  instrument.  This  Employment  Agreement  may be
executed by facsimile signature.

     IN WITNESS WHEREOF,  the parties have executed this Employment Agreement on
the day and year first set forth above.

                                  FAC REALTY, INC., a Delaware corporation



                                  By: ____________________________________(SEAL)
                                           Patrick M. Miniutti
                                           Executive Vice President
                                           Chief Financial Officer



                                  By: ____________________________________
                                           Theodore E. Haigler, Jr.
                                           Chairman of Executive Compensation
                                           Committee



                                  ________________________________________(SEAL)
                                  C. Cammack Morton



                                      -16-