Firstly, I would update the graphics. Fable 3 tried for cartoony, yet still realistic graphics, and they generally looked pretty bad.
Secondly, I would add a mana bar and a health bar, and make it so you can actually DIE. There is absolutely no consequence for getting downed in Fable 2 or 3, and I hate that.
Thirdly, I would change the combat quite a bit. If you have your sword, mace, hammer, axe, etc out, you are in melee mode. There is a button for dodging heavy attacks, a button for blocking light attacks, and a button for heavy attacks as well as one for light attacks. Guns now have ammo, take longer to reload, and switch your perspective to an over-the-shoulder camera, and ammo is more expensive, but guns generally do a lot of damage. Magic takes a longer time to be good at. Targetting a single enemy is more powerful and uses slightly less mana. Area of Effect spells hit every enemy in a certain radius, but cost more and do slightly less damage.
Fourth, I would make the story somewhat more dark, and remove most of the "humor." The game tries to be serious with its threat of a great evil coming, but at the same time tries to be whacky, and it just doesn't work.
Fifth, I would make it so weapons are available at stores, but they never get upgraded. You have to go out and find legendary weapons that can be upgraded in, say, dungeons and such. I would also bring armor back, because I hate that you can fight in your pyjamas with absolutely no difference than if you were wearing warrior armor.
Sixth, I would make the upgrade system actually MEAN something, and not be almost entirely random. For every set number of levels you get in one of the disciplines (melee, ranged, magic) you get to choose one upgrade. Say, for melee, you can choose between faster attacks that do less damage, or heavier attacks that are slower. You would also be able to pick what you want your weapon to look like at the same time.
Seventh, I would make the quest lines longer. Early in Fable 3, you are told that some mercenary warlord is causing problems for the Dwellers. You immediately sprint over there, not seeing a single mercenary on your way there, burst in, and fight the warlord. Who surrenders in about a minute of fighting. The game pretty much forces an NPC in your face and immediately expects you to care about him, or what he's doing. If there had been some build-up prior to me stabbing him in the face, maybe I would have actually felt like I was doing the right thing. Instead, it felt more like I had just burst into his house for no reason and started attacking him.
Eighth, get rid of the whole "king of albion" bit. There was nothing enjoyable about it, and nothing about it made it feel like you were actually the king.
Lastly, I would make the world A LOT bigger. After about an hour of walking around, you've pretty much seen the extent of the game. I want to be able to explore and constantly be finding new caves, dungeons, towns, etc.