INCENTIVE STOCK OPTION AGREEMENT


         THIS AGREEMENT is made as of the 18th day of July, 1996, by and between
FAC REALTY, INC., a Delaware corporation (the "Company"), and Michaela M.
Twomey, an individual (the "Holder"), pursuant to and under authority of the
Company's, 1993 Employee Stock Incentive Plan (the "Plan").

                              W I T N E S S E T H:

         WHEREAS, the Company desires to provide the Holder with an option to
purchase Thirty- Five Thousand (35,000) shares of Common Stock, $.01 par value,
of the Company ("Shares"); and

         WHEREAS, the Holder desires to accept such option;

         NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, the parties hereto hereby agree as follows:

         1. Grant of Option. The Company does hereby grant to the Holder, and
the Holder does hereby accept, the right and option (the "Option") to purchase,
at the option of the Holder, 35,000 Shares at the option price of $8.875 per
Share and upon and subject to the other terms and conditions hereof.
Notwithstanding the foregoing, if at any or from time to time the number of
Shares are increased or decreased, or changed into or exchanged for a different
number or kind of shares of stock or other securities of the Company or of
another corporation (whether as a result of a stock split, stock dividend,
combination or exchange of shares, exchange for other securities,
reclassification, reorganization, redesignation, merger, consolidation,
recapitalization or otherwise), then (i) there shall automatically be
substituted, for each Share for which the Option has not been exercised, the
number and kind of shares of stock or other securities into which each
outstanding share shall be changed or for which each such share shall be
exchanged, and (ii) the option price per Share shall be increased or decreased
proportionately so that the aggregate exercise price for the Shares subject to
the Option shall remain the same as immediately prior to such event. In addition
to the foregoing, the Company shall be entitled in the event of any such
increase, decrease or exchange of Shares to make adjustments to this Agreement
(including adjustments which may provide for the elimination of fractional
shares) which do not have a material adverse effect upon the Holder, where
necessary to preserve the terms and conditions hereof.

         2. Term of the Option. Subject to the other terms and conditions
hereof, the Option shall vest with respect to Seven Thousand (7,000) Shares on
the Effective Date and shall vest with respect to Seven Thousand (7,000) Shares
per year on the first through fourth anniversaries of the Effective Date, and is
exercisable, in whole or in part, only with respect to those Shares for which
the Option has become vested. Shares for which the Option has become exercisable
shall be referred to herein as "Vested Shares", and Shares for which the Option
has not become exercisable shall be referred to herein as "Unvested Shares". The
Option shall terminate on July


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17, 2006 and must be exercised, if at all, before such date and shall not
thereafter be exercisable, notwithstanding anything herein to the contrary. The
"Effective Date" for the purpose of this Paragraph 2 shall be the date first
above written.

         3. 1993 Employee Stock Incentive Plan. This Option is in all respects
subject to the terms and conditions of the Plan, which is incorporated by
reference herein.

         4. Exercise. (i) Subject to the other terms and conditions hereof, and
provided payment is made as provided below, the Option shall be exercisable from
time to time by written notice to the Company (in the form required by the
Company) which shall:

                  (a) state that the Option is thereby being exercised, the
         number of Shares with respect to which the Option is being exercised,
         each person in whose name any certificates for the Shares should be
         registered and such person's address and social security number;

                  (b) be signed by the person or persons entitled to exercise
         the Option and, if the Option is being exercised by anyone other than
         the Holder, be accompanied by proof satisfactory to counsel for the
         Company of the right of such person or persons to exercise the Option
         under all applicable laws and regulations; and

                  (c) be accompanied by such representations, warranties or
         agreements with respect to the investment intent of such person or
         persons exercising the Option and the compliance with any applicable
         law or regulation or to confirm any factual matters as the Company or
         its counsel may reasonably request, in form and substance satisfactory
         to counsel for the Company.

                           (ii) Payment of the Option price may be made, in the
discretion of the person exercising the Option, in one of the following manners,
or in any other manner approved by the Administrator (as "Administrator" is
defined in the Plan), in its sole discretion:

                  (a) the written notice to the Company described above may be
         accompanied by full payment of the option price in cash or by check,
         or, with the consent of the Company, in whole or in part with a
         surrender of previously acquired Shares of the Company having a Fair
         Market Value (as defined below) on the date of exercise equal to that
         portion of the purchase price for which payment in cash or check is not
         made. The later of the dates on which such notice and payment are
         received by the Company shall be the date of exercise of the Option;
         and

                  (b) within five days of the giving of the written notice to
         the Company described above, the funds to pay for exercise of the
         Option may be delivered to the Company a broker acting on behalf of the
         person exercising the Option either in connection with the sale of the
         Shares underlying the Option or in connection with the making of a
         margin loan to such person to enable payment of the exercise price of
         the

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         Option. The later of the dates on which such notice and payment are
         received by the Company shall be the date of exercise of the Option. In
         connection with any such exercise, the Company will provide a copy of
         the notice of exercise of the Option to the aforesaid broker upon
         receipt by the Company of such notice and will deliver to such broker,
         within five business days of the delivery of such notice to the
         Company, a certificate or certificates (as requested by the broker)
         representing the number of Shares underlying the Option that have been
         sold by such broker for the person exercising the Option.

                           (iii) For purposes hereof, the "Fair Market Value" of
a Share as of a given date shall be (in order of applicability): (a) the closing
price of a Share on the principal exchange on which the Shares are then trading,
if any, on the day immediately prior to such date, or if Shares were not traded
on the day previous to such date, then on the next preceding trading day during
which a sale occurred; or (b) if Shares are not traded on an exchange but are
quoted on NASDAQ or a successor quotation system, (1) the last sale price (if
Shares are then listed as a National Market Issue under the NASD national Market
System), or (2) if Shares are not then so listed, the mean between the closing
representative bid and asked prices for Shares on the day previous t such date
as reported by NASDAQ or such successor quotation system; or (c) if Shares are
not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the mean between the closing bid and asked prices for Shares,
on the day previous to such date, as determined in good faith by the
Administrator; and (d) if Shares are not publicly traded, the fair market value
established by the Administrator acting in good faith.

                           (iv) Upon exercise of the Option and the satisfaction
of all conditions thereto, the Company shall deliver a certificate or
certificates for Shares to the specified person or persons at the specified time
upon receipt of payment for such Shares as set forth above.

         5. Termination of Employment. If the Holder's employment with the
Company ends on account of her death or permanent and total disability, the
Option shall automatically become vested with respect to all Shares, and the
Option must be exercised, if at all, within the one-year period ending on the
anniversary of such death or permanent and total disability. In the case of
death, the Option shall be exercised by the Holder's estate or the person
designated by the Holder by will, or as otherwise designated by the laws of
descent and distribution. If the Holder's employment with the Company ends due
to termination of her employment by the Company "without cause" (as defined in
Section 8 of the Plan), the Option may and must be exercised, if at all, with
respect to any or all of the Vested Shares, within one year of the date of such
termination. In all other instances that the Holder ceases to be an employee of
the Company, the Holder shall have no right after her employment ends to
exercise all or any part of this Option with respect to either Vested or
Unvested Shares. For purposes hereof, "permanent and total disability" is
defined in Section 8 of the Plan.





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         6. Transferability. The Option and the Holder's rights therein are not
transferable by the Holder, except upon the death of the Holder as provided in
Paragraph 5. The Option is exercisable (subject to any other applicable
restrictions on exercise) only by the Holder, except when a guardian or other
legal representative has been duly appointed for the Holder and except in the
event of the Holder's death as provided in Paragraph 5.

         7. Taxes. The Holder hereby agrees to pay to the Company any federal,
state or local taxes of any kind that may be required by law to be withheld and
remitted by the Company with respect to the Option and the exercise thereof. If
the Holder does not make such payment to the Company, the Company, to the extent
required or permitted by law, shall have the right to withhold from any payment
of any kind otherwise due to the Holder from the Company, any federal, state or
local taxes of any kind required by law to be withheld with respect to the
Option or the Shares which are the subject of the Option. The Administrator, in
its sole discretion, may permit the Holder to pay such taxes through the
withholding of Shares otherwise deliverable to the Holder upon exercise of the
Option or the delivery to the Company of Common Shares otherwise acquired by the
Holder. The fair market value of Common Shares withheld by the Company or
tendered to the Company for the satisfaction of any tax withholding obligations
determined to exist under this Paragraph 8 shall be determined on the date such
Common Shares are withheld or tendered.

         8. Intent. This Option is an incentive stock option as defined in
Section 422 of the Code.

         9. Securities Law Compliance. Notwithstanding any provision of this
Agreement to the contrary, the Option shall not be exercisable unless, at the
time the Holder attempts to exercise the Option, in the opinion of counsel for
the Company, all applicable securities laws, rules and regulations have been
complied with. The Holder agrees that the Administrator may impose such
restrictions on the Shares as are deemed advisable by the Administrator,
including, without limitation, restrictions relating to listing or trading
requirements. The Holder further agrees that certificates representing the
Shares may bear such legends and statements as the Administrator shall deem
appropriate or advisable to assure, among other things, compliance with
applicable securities laws, rules and regulations.

         10. Rights of the Holder. The Holder shall have no dividend, voting or
other rights of a stockholder with respect to the Shares which are subject to
the Option prior to the purchase of such Shares upon exercise of the Option and
the execution and delivery of all other documents and instruments deemed
necessary or desirable by the Company.






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         11. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, except to the extent
otherwise governed by Federal law.

         IN WITNESS WHEREOF, the parties have subscribed their names hereto as
of the date first above written.


                  FAC REALTY, INC.,
                  a Delaware corporation


                  By:      /s/ J. Dixon Fleming, Jr.
                           J. Dixon Fleming, Jr.
                           Chairman and Chief Executive Officer




                            /s/ Michaela M. Twomey
                            Michaela M. Twomey

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