How to close a modal by clicking outside the modal window?

Changing your function like so should work:

    $('#close, #overlay').click(function(e) {
      e.preventDefault();
      $('#overlay, #alertModalOuter').fadeOut(400, function() {
      $('#close').remove();
    });
});

I found it helpful to include:

$('.item-modal').click(function(e) {
  e.stopPropagation();
});

Add the same click listener to your overlay.