Factions | Stronghold 3 Editor Overview
Factions are what estates used to be called. When you're painting a faction, you're actually painting an estate for a village/castle. From the first menu that appears, you can organise the estates on your map. This is done by clicking on the "add" or "remove" button down the bottom.
First off, let's take a look at the "faction" list: 
The name column to the left indicates the name of the estate, this cannot be changed by itself and increments with every estate added. Next, the player name. You are always Player 1, so the other players are either AI, or other human players (multiplayer). If you do not need all the estates, then you can simply left click the estate you do not want and then "remove" down the bottom. Note though that you can only remove estates which are secondary.
To add a new estate, select the "add" button. This will add a new estate belong to the player who your left mouse has currently selected. e.g. if you have your mouse over estate1 and select add, then a new estate will be added for Player 1. The colour will be the same as the original colour - the colours cannot be changed on this sub-menu. The "primary" column is to indicate whether the current estate is the primary estate belonging to the user. From this example here: 
The "primary" estate of the human player is Estate 1, so this is indicated as such. You can assign estates to players, and each estate has the ability to be a castle or village. And each colour is a faction.
On the players submenu, you have the ability to set the player colour from the available colours:
- Red
- Blue
- Green
- Aqua
- Yellow
- Orange
- Purple
- Fuchisa
Using this form, you can change the player colours, and the lord type. One good thing to note with the new editor, is that if you decide you want a player colour changing, you can change it in two clicks here. Select the player, select the colour and then all of that player's colour on the map will be updated.
On the final player sub-tab, you can set teams of players against each other. 
You can have practically endless amounts of teams, and on each one you left click a player to include/exclude it from the team. Teams are an important way of ensuring that players are hostile/friendly to the correct players and the new interface really simplifies this as you no longer have to setup a scripted event.
In Stronghold Crusader 2, you can place "spawn points". These represent where the keep will be placed for an estate in the map. Below is an example of a spawn point: 