AVALON PROPERTIES, INC.

                                      AND

                             THE BANK OF NEW YORK


                        ------------------------------

                         Third Supplemental Indenture

                         Dated as of January 22, 1998


                        ------------------------------


                     Supplemental to Indenture dated as of

                              September 18, 1995
<PAGE>

                         THIRD SUPPLEMENTAL INDENTURE

     THIRD SUPPLEMENTAL INDENTURE, dated as of January 22, 1998, between Avalon
Properties, Inc., a Maryland corporation (hereinafter called the "Company"),
having its principal office at 15 River Road, Wilton, Connecticut 06897, and The
Bank of New York, a New York banking corporation, as successor to Signet Trust
Company (hereinafter called the "Trustee"), having a Corporate Trust Office at
101 Barclay Street, Floor 21 West, New York, New York 10286, as Trustee under
the Indenture (as hereinafter defined).

                                   RECITALS

     The Company and Signet Trust Company, as trustee, have heretofore entered
into an Indenture and First Supplemental Indenture, each dated as of September
18, 1995, and the Company and The Bank of New York, as successor trustee, have
heretofore entered into a Second Supplemental Indenture, dated as of December
16, 1997 (hereinafter called the "Indenture"), providing for the issuance by the
Company from time to time of its senior debt securities evidencing its unsecured
and unsubordinated indebtedness (the "Securities");

     The Company desires to issue senior debt securities under the Indenture in
the form of, and having the terms set forth in, Exhibit A to this Third
                                                ---------
Supplemental Indenture, the terms of which are incorporated herein and made a
part hereof, and has duly authorized the execution and delivery of this Third
Supplemental Indenture to modify the Indenture as hereinafter described.

         NOW, THEREFORE, THIS THIRD SUPPLEMENTAL INDENTURE WITNESSETH:

     For and in consideration of the premises, the Company and the Trustee
covenant and agree, for the equal and proportionate benefit of all Holders of
the Securities, as follows:

                                  ARTICLE ONE

Section 1.01.  A series of the Registered Securities shall be substantially in
the form of Exhibit A hereto.
            ---------

                                  ARTICLE TWO

Section 2.01.  All capitalized terms which are used herein and not otherwise
defined herein are defined in the Indenture and are used herein with the same
meanings as in the Indenture.

Section 2.02.  This Third Supplemental Indenture shall be effective as of the
date first above written and upon the execution and delivery hereof by each of
the parties hereto.

Section 2.03.  This Third Supplemental Indenture shall be governed by, and
construed in accordance with, the laws of the State of New York.
<PAGE>

Section 2.04.  This Third Supplemental Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.

                  [Remainder of Page Intentionally Left Blank]


                                       2
<PAGE>

    IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental
Indenture to be duly executed by their respective officers hereunto duly
authorized, all as of the day and year first above written.

AVALON PROPERTIES, INC.


By:    /s/ Thomas J. Sargeant                    Dated: January 22, 1998
   --------------------------------
Name:  Thomas J. Sargeant
Title: Chief Financial Officer and Treasurer

Attest:


THE BANK OF NEW YORK, as Trustee


By:    /s/ MaryBeth Lewicki                      Dated: January 22, 1998
   --------------------------------
Name:  MaryBeth Lewicki
Title: Assistant Vice President
<PAGE>

                                 ACKNOWLEDGMENT

STATE OF CONNECTICUT)
                                                        ) ss:
COUNTY OF FAIRFIELD)


On January 22, 1998, before me personally came Thomas J. Sargeant, to me known,
who, being by me duly sworn, did depose and say that he is the Chief Financial
Officer and Treasurer of AVALON PROPERTIES, INC., one of the parties described
in and which executed the foregoing instrument, and that he signed his name
thereto by authority of the Board of Directors.

[Notarial Seal]

  /s/ Beth Meryl Deitz
--------------------------------------
Notary Public
Commission Expires

[BETH MERYL DEITZ
NOTARY PUBLIC
MY COMMISSION EXPIRES APRIL 30, 1999]
<PAGE>

                                   EXHIBIT A
                                   ---------


                            [Form of Face of Note]


THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE THEREOF. THIS SECURITY MAY NOT BE TRANSFERRED TO, OR REGISTERED OR
EXCHANGED FOR SECURITIES REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE
DEPOSITORY OR A NOMINEE THEREOF AND NO SUCH TRANSFER MAY BE REGISTERED, EXCEPT
IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND MAY NOT BE
TRANSFERRED EXCEPT AS A WHOLE BY DTC TO A NOMINEE OF DTC OR ANOTHER NOMINEE OF
DTC OR BY DTC OR ITS NOMINEE TO A SUCCESSOR DEPOSITORY OR ITS NOMINEE.

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY (AS
DEFINED BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

                            AVALON PROPERTIES, INC.

                             6 5/8%  NOTE DUE 2005



REGISTERED                                       PRINCIPAL AMOUNT
No.: R-001                                           $100,000,000

CUSIP No.: 053469 AD 4



     AVALON PROPERTIES, INC., a corporation organized and existing under the
laws of
<PAGE>

the State of Maryland (hereinafter called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to CEDE & Co., or registered assigns, upon
presentation, the principal sum of One Hundred Million Dollars ($100,000,000) on
January 15, 2005 at the office or agency of the Company referred to below, and
to pay interest thereon from January 15, 1998, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-annually
in arrears on January 15 and July 15 in each year, commencing July 15, 1998, at
the rate of 6 5/8% per annum, until the entire principal hereof is paid or made
available for payment. The interest so payable, and punctually paid or duly
provided for on any Interest Payment Date will, as provided for in the
Indenture, be paid to the person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest which shall be the December 31 or June 30 (whether
or not a Business Day), as the case may be, next preceding such Interest Payment
Date. Any such interest not so punctually paid or duly provided for shall
forthwith cease to be payable to the Holder on such Regular Record Date, and may
either be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to Holders of Securities of this series
not more than 15 days and not less than 10 days prior to such Special Record
Date, or may be paid at any time in any other lawful manner not inconsistent
with the requirements of any securities exchange on which the Securities of this
Series may be listed, and upon such notice as may be required by such exchange,
all as more fully provided in the Indenture.

     Payment of the principal of, or Make-Whole Amount, if any, and interest on,
the Securities will be made to The Depository Trust Company or its nominee in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts; provided, however, that
at the option of the Company payment of interest may be made by (i) check mailed
to the address of the Person entitled thereto as such address shall appear in
the Security Register or (ii) by wire transfer of funds to an account of the
Person entitled thereto maintained within the United States.  The Company is not
required to maintain an office or agency for such payment in the City of New
York.

     Securities of this series may be redeemed at any time at the option of the
Company, in whole or in part, upon notice of not more than 60 nor less than 30
days prior to the Redemption Date, at a redemption price equal to the sum of (i)
the principal amount of the Securities being redeemed plus accrued interest
thereon to the Redemption Date and (ii) the Make-Whole Amount, if any, with
respect to such Securities.

     REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS SECURITY SET
FORTH ON THE REVERSE HEREOF, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES
HAVE THE SAME EFFECT AS IF SET FORTH IN THIS

                                       2
<PAGE>

PLACE.

     Unless the Certificate of Authentication hereon has been executed by or on
behalf of the Trustee by manual signature, this Security shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.



                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       3
<PAGE>

     IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

                                    AVALON PROPERTIES, INC.


Dated: January 22, 1998             By:
                                       ----------------------------------
                                    Name:
                                    Title:


Attest:



By:
   --------------------------------------
Name:
Title:


[SEAL]



                   TRUSTEE'S CERTIFICATE OF AUTHENTICATION:

     This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.

THE BANK OF NEW YORK,
as Trustee


By:                                 Dated: January 22, 1998
   ------------------------------
   Authorized Officer

                                       4
<PAGE>

                           [Form of Reverse of Note]


                            AVALON PROPERTIES, INC.

                             6 5/8% NOTE DUE 2005


     This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under an Indenture, dated as of September 18, 1995, as supplemented by
the First Supplemental Indenture, dated as of September 18, 1995, each between
the Company and Signet Trust Company, and the Second Supplemental Indenture,
dated as of December 16, 1997, and Third Supplemental Indenture, dated as of
January 22, 1998 (as so supplemented, herein called the "Indenture"), each
between the Company and The Bank of New York, a New York banking corporation, as
successor trustee (herein called the "Trustee," which term includes any
successor trustee under the Indenture with respect to the series of which this
Security is a part), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities thereunder of the Company, the Trustee and the
Holders of the Securities and of the terms upon which the Securities are, and
are to be, authenticated and delivered. This Security is one of the series
designated on the first page hereof, limited in aggregate principal amount to
$100,000,000.

     "Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Security, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest (exclusive
of interest accrued to the date of redemption or accelerated payment) that would
have been payable in respect of such dollar if such redemption or accelerated
payment had not been made, determined by discounting, on a semi-annual basis,
such principal and interest at the Reinvestment Rate (determined on the third
Business Day preceding the date such notice of redemption is given or
declaration of acceleration is made) from the respective dates on which such
principal and interest would have been payable if such redemption or accelerated
payment had not been made, over (ii) the aggregate principal amount of the
Securities being redeemed or paid.

     "Reinvestment Rate" means .25% (twenty-five one hundredths of one percent)
plus the arithmetic mean of the yields under the respective headings "This Week"
and "Last Week" published in the Statistical Release under the caption "Treasury
Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid.  If no maturity exactly corresponds to such
maturity, yields for the two published maturities most closely corresponding to
such

                                       5
<PAGE>

maturity shall be calculated pursuant to the immediately preceding sentence
and the Reinvestment Rate shall be interpolated or extrapolated from such yields
on a straight-line basis, rounding in each of such relevant periods to the
nearest month.  For purposes of calculating the Reinvestment Rate, the most
recent Statistical Release published prior to the date of determination of the
Make-Whole Amount shall be used.

     "Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States government
securities adjusted to constant maturities or, if such statistical release is
not published at the time of any determination under the Indenture, then such
other reasonably comparable index which shall be designated by the Company.

     The Indenture contains provisions for defeasance at any time of (a) the
entire indebtedness of the Company on this Security and (b) certain restrictive
covenants and the related defaults and Events of Default applicable to the
Company, in each case, upon compliance by the Company with certain conditions
set forth in the Indenture, which provisions apply to this Security.

     If any Event of Default with respect to Securities of this series shall
occur and be continuing, the principal of, and the Make-Whole Amount, if any,
on, the Securities of this series may be declared due and payable in the manner
and with the effect provided in the Indenture.

     As provided in and subject to the provisions of the Indenture, the Holder
of this Security shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee, offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and the Trustee shall have failed to institute any such
proceeding, for 60 days after receipt of such notice, request and offer of
indemnity. The foregoing shall not apply to any suit instituted by the Holder of
this Security for the enforcement of any payment of principal hereof (and
premium or Make-Whole Amount, if any) or any interest on and any Additional
Amounts in respect thereof on or after the respective due dates expressed
herein.

     The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders

                                       6
<PAGE>

of the Securities of each series to be affected under the Indenture at any time
by the Company and the Trustee with the consent of the Holders of not less than
a majority in principal amount of the Securities of each series at the time
Outstanding affected thereby. The Indenture also contains provisions permitting
the Holders of specified percentages in principal amount of the Securities of
each series at the time Outstanding, on behalf of the Holders of all Securities
of such series, to waive compliance by the Company with certain provisions of
the Indenture and certain past defaults under the Indenture and their
consequences. Any such consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange herefor or in lieu hereof, whether or not notation of such consent
or waiver is made upon this Security.

     No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, Make-Whole Amount, if any,
on, and interest on this Security at the times, place and rate, and in the coin
or currency, herein prescribed.

     As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company in any Place of Payment where the principal of, Make-Whole
Amount, if any, on, and interest on this Security are payable, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
this series, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.

     The Securities of this series are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof.  As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series of a different authorized denomination, as
requested by the Holder surrendering the same.

     No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.

     Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice

                                       7
<PAGE>

to the contrary.

     No recourse under or upon any obligation, covenant or agreement contained
in the Indenture or in this Security, or because of any indebtedness evidenced
thereby, shall be had against any promoter, as such or, against any past,
present or future stockholder, officer or director, as such, of the Company or
of any successor, either directly or through the Company or any successor, under
any rule of law, statute or constitutional provision or by the enforcement of
any assessment or by any legal or equitable proceeding or otherwise, all such
liability being expressly waived and released by the acceptance of this Security
by the Holder thereof and as part of the consideration for the issue of the
Securities of this series.

     All terms used in this security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.

     THE INDENTURE AND THE SECURITIES, INCLUDING THIS SECURITY, SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

     Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused "CUSIP" numbers to be
printed on the Securities of this series as convenience to the Holders of such
Securities. No representation is made as to the correctness or accuracy of such
CUSIP numbers as printed on the Securities, and reliance may be placed only on
the other identification numbers printed hereon.


                    [REMAINDER OF PAGE INTENTIONALLY BLANK]

                                       8
<PAGE>

                                 ABBREVIATIONS

     The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<CAPTION>
<S>                                            <C>
TEN COMM  --  as tenants in common              UNIF GIFT MIN ACT --
TEN ENT  --  as tenants by the entireties       ________ Custodian ________
                                                (Cust)                  (Minor)
JT TEN  --  as joint tenants with right of      Under Uniform Gifts to Minors Act
                                                                                 ---------------
            survivorship and not as tenants in                                            (State)
            common
 </TABLE>

Additional abbreviations may also be used though not in the above list.

                             ------------------------------

Social Security or taxpayer I.D. or other identifying number of assignee

-------------------------------------------------------

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto

------------------------------------------------------------------------------

------------------------------------------------------------------------------
                         (name and address of assignee)

the within Note and all rights thereunder, hereby irrevocably constituting and
appointing                                         , attorney to transfer said
           ----------------------------------------
Note on the books kept for registration thereof, with full power of substitution
in the premises.


Dated:
      ------------------------------

                                           -----------------------------------

Source: OneCLE Business Contracts.